How Does A Reverse Mortgage Work?

If you are a senior, aged at least 62, then you are eligible for a reverse mortgage, but you are probably still wondering, “How does a reverse mortgage work?”  They are not quite as complicated as you may think.

They are, in fact, a low interest loan that utilizes the equity in your home as collateral.  The amount of the loan is determined by calculating a percentage of the value of the home and the age of the youngest homeowner.  Once approved, the owner(s) receive monthly payments that can help supplement their income.  As long as the owner(s) continue to live in the house, they do not have to repay the loan.  Until the homeowner passes away or moves out, no payments are required.

When the owners do pass away or move, then their estate has about 12 months to either repay the balance or sell the home in order to pay the balance on the reverse mortgage.  If there is equity, then it goes to the estate.  If the home sells for less than the balance of the reverse mortgage (due to market conditions etc.), the estate is not liable.

Who Is Eligible For A Reverse Mortgage?

In regard to a HUD reverse mortgage, the FHA states that the homeowners need to be at least age 62.  Also, the home in question needs to be either owned free and clear or the balance of the existing mortgage can be no more than about 65% of the home’s estimated value.  The proceeds of the reverse mortgage can go to pay any balance outstanding on the home in this instance.  Also, there are not any income or credit requirements in order to qualify for a reverse mortgage.

Just about all homes are eligible.  If yours is a mobile home, it has to have been built within the last 30 years and the owners have to own the land it is on.  It also needs to be on a permanent foundation and pass an FHA inspection.

Which Is Better? A Reverse Mortgage Or A Home Equity Loan?

Choosing a reverse mortgage or a home equity loan really depends on your situation and the reason that you need the loan in the first place.

Usually a home equity loan is either in the form of a second mortgage or a home equity line of credit, and these have strict requirements in terms of credit scores and income levels.  If you are looking to mainly consolidate bills, you may not mind the fact that you (the homeowner) will be required to make monthly payments and have to repay the loan right away.  The reverse mortgage has none of the credit or income requirements that a home equity loan has and instead of having to send out a monthly amount, the homeowner actually receives a monthly amount.

The amount borrowed with a reverse mortgage is determined by a formula that takes into account the age, current interest rate and appraised value of the house.  This FHA formula is laid out so that the older the homeowner is, the lower the interest rate on the loan.  If the home is in good shape and receives a high appraisal, then the loan amount will reflect that.

With a reverse mortgage, the homeowner also cannot be made to foreclose or vacate the home due to a missed mortgage payment.  Of course, they are still responsible for the taxes, insurance and maintenance of the home while they live there.