How Does a Reverse Mortgage Work?

How Does a Reverse Mortgage Work?

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Understanding How Reverse Mortgages Work

You have probably seen commercials and heard your friends discuss reverse mortgages. If you still can’t grasp how reverse mortgages work, we have broken down the basics in this article.

Reverse mortgages – also called home equity conversion mortgages (HECM) – are loans for seniors 62 and older who want to convert the equity in their homes into funds that they can use now. 

Reverse mortgages are similar to regular mortgages in that they are both loans, using your home as collateral.  In a traditional mortgage, you purchase a home and pay the monthly lender payments based on the amount borrowed.  In a reverse mortgage, the homeowner either owns the home outright or has considerable equity in the home, which is used as the loan’s collateral.    

What Are The Requirements For a Reverse Mortgage?

Reverse mortgages are not for everyone.  There are various requirements to qualify for these loans. Age is the first qualifier, with the minimum age being 62.  There is no maximum age.  The borrower must also either own the home free and clear or have substantial equity in the house.  The U.S. Department of Housing and Urban Development (HUD) requires that the borrowers complete a counseling session before taking out a reverse mortgage, which walks applicants through the pros and cons of having a reverse mortgage.  

The borrower must also occupy the property as a primary residence.  Vacation, seasonal, and unoccupied properties do not qualify for a reverse mortgage.  The borrower must not be delinquent on any federal debt and must have sufficient funds to pay for property taxes, homeowner’s insurance, mortgage insurance, and possession of a home in good repair.  

Though the borrower still owns the home, just like with a traditional mortgage, the mortgage is payable in full if he dies or moves.  If the borrower dies, their heirs will need to pay the mortgage in full, either with their funds or with equity from the home’s sale.  If the house sells and cannot satisfy the loan balance, the heirs are not responsible for shortages.   

How Are Funds Distributed With a Reverse Mortgage?

There are generally two types of reverse mortgages: Variable Rate and Fixed Rate.

With a variable rate, a borrower may receive a higher limit to the principal if they are older or if the property has a greater value or a lower interest rate.  The variable rate options for receiving your proceeds include:

  • Equal monthly payments 
  • A line of credit
  • A combination of payments plus a line of credit

With a fixed rate, the homeowner generally receives a lump sum payment.  Speak with your lender about all the options available to you.  They will help you determine the best way to proceed, usually based on how you plan to use the distribution.  Some ways that homeowners use the funds from a reverse mortgage include:

  • Medical expenses, including home accessibility improvements
  • Home improvements or repairs to the home 
  • Supplement to retirement income

How Does A Reverse Mortgage Work?

A reverse mortgage makes it possible for homeowners 62 and older to use the equity in their homes to cover necessary expenses and supplement their income to live more comfortably during retirement.  The experts at Northwest Reverse Mortgage can help you understand the process and determine the type of reverse mortgage that will best suit your needs.  We are licensed professionals and serve homeowners in the northwest: California, Oregon, Washington, and Idaho.  Contact us today with questions, or visit one of our convenient locations for more information.  You can always find more information with Northwest Reverse Mortage.

Image Credit: William Potter

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© 2019 Northwest Reverse Mortgage, LLC NMLS #1834787
Idaho Branch #2123574

Licensed in Oregon, Washington, California and Idaho

Number:
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Toll Free: (800) 806-1472
Fax: (541) 253-4370

Washington Local Contact:
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Central/Southern Oregon Contact:
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Northwest Reverse Mortgage
10121 SE Sunnyside Rd
Ste 300
Clackamas, OR 97015
Phone: (503) 427-1667

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950 W Bannock St
Suite 1100
Boise, ID 83702
Phone: (208) 635-0806

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17901 Von Karman Avenue
Ste 600
Irvine, CA 92614
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Northwest Reverse Mortgage, LLC. ML- 5797/ CL-1834787/ DFPI# 60DBO-140333. Equal Opportunity Mortgage Broker licensed in Oregon, Washington, Idaho and California. Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. Credit on approval. Terms subject to change without notice. Not a commitment to lend. Contents not provided by, or approved by FHA, HUD or any other government agency. All potential tax benefits should be verified with a professional licensed tax advisor. NMLS Consumer Access

At the conclusion of a reverse mortgage, the borrower must repay the loan and may have to sell the home or repay the loan from other proceeds; charges will be assessed with the loan, including an origination fee, closing costs, mortgage insurance premiums and servicing fees; the loan balance grows over time and interest is charged on the outstanding balance; the borrower remains responsible for property taxes, hazard insurance and home maintenance, and failure to pay these amounts may result in the loss of the home; interest on a reverse mortgage is not tax deductible until the borrower makes partial or full re-payment.