Real Estate

How Does A Reverse Mortgage Work?

If you’re over the age of 62 and a current homeowner, did you know that you can tap into the hidden equity of your home using a reverse mortgage?

And during your golden years, it’s essential to understand all of your options, especially if you qualify for a reverse mortgage. There is so much unknown information about a reverse mortgage. Most people don’t even know what it is, let alone how it works.

What is a reverse mortgage and what it is not?

A reverse mortgage is not a loan where the bank takes your home. Secondly, it is not a loan of last resort. This loan is one of the best loans you can use for strategic planning during your golden years. So, let me now define what a reverse mortgage is.

It’s a reverse mortgage is an FHA-insured line of credit that can never be reduced, or revoked. It’s just like any other mortgage where you use a loan to access your home’s equity, or for the purchase of a home. But that’s where the similarities end.

The key difference is, with the reverse mortgage, you never have to make a mortgage payment for as long as you live in the home. So, now that you have some context into what a reverse mortgage is, and isn’t, let’s go into more detail about what a reverse mortgage really is and how it really works.

Concept of Reverse Mortgage

Isn’t this the loan where the bank takes your house at the end, or you’re just giving your house to the bank?

The answer is absolute no. You still own the home. You still own your equity and you can still leave to your heirs when you pass.

What happens to the loan when I sell or move out?

This is a great question to be asking. Obviously, you’re able to sell your home. And if you decide down the road, you want to, you simply sell the home. If that’s your choice at that point, the loan would then become due, whatever the balance is at that time would simply get paid off and you keep the remaining equity. Or if you decide to move out of the home for more than 12 months and not sell at that point, the loan would also become due.

Now, this is important, because if you do decide to move out of the home for more than 12 months, the loan would become due. So, you can either refinance it using a traditional mortgage. Then you’d have to start making payments, or you could pay it off with cash, if you have access to enough cash, or you could simply sell the home.

The reason reverse mortgage is becoming so popular is that it provides so much flexibility in order to meet your cash flow needs and your future goals.

What happens to the home when I pass? Can I still leave it to my kids?

The simple answer is yes. You can still leave the home to your heirs. And keep in mind, after you pass, they’ll actually get up to 12 months to determine what they’re going to do with the property.

They can either pay off the existing mortgage using cash, or they can pay off the reverse mortgage using traditional financing. Lastly, they can simply sell the home. They pay off the balance that’s due and the remaining equity gets split among the heirs.

Keep in mind during that 12 month period, when your heirs are deciding what they want to do with the property, with a reverse mortgage, they don’t have to make a mortgage payment, unlike a traditional mortgage, where they would have to make that mortgage payment, whether you’re breathing or not.

So, as you can see, this is why these reverse mortgages are becoming so popular as a financing tool for seniors.

How do I qualify for a reverse mortgage? How do I get one?

So, the basics are simple. You have to be at least 62 years old or older, and you have to be a homeowner. There is no upper age limit though. The home does have to be on your primary residence. However, you can access the equity from your primary residence and use those funds anywhere you want.

This means if you have a rental property, you can’t do the reverse mortgage on your rental property, you have to do it on your primary residence. However, you can still use those funds to fix up your rental property if you want to. Now, it’s creative ideas like that, that really allows you so much flexibility and so many options.

For example, I someone to access the equity from their home and build an ADU so that they could rent it out for increased cash flow and they don’t have to make a monthly mortgage payment.

They did that reverse mortgage and they did all those improvements without spending any money out of their own pocket.

Key to having and maintaining a reverse mortgage.

First and foremost, it’s got to be your primary residence and you do have to maintain paying the property taxes and the homeowner’s insurance, as well as keeping up the property.

In fact, there is another option for those that qualify, the new lender may be able to pay your property taxes and homeowner’s insurance for as long as you live in that home, regardless of the value of your home.

A lot of people love this option if they qualify for it because they don’t ever have to worry about writing another check to the County or the insurance company ever again, the lender takes care of that. And besides, they don’t have to save up for it or feel that big pinch when it’s actually time to pay.

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