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Reverse Mortgages


Reverse mortgage is a way to convert part of the equity in a home into a tax-free income. In order to be eligible for a reverse mortgage usually you must be 62 or more years old. It's a loan for retired or soon to be retired people that want to get some money against their home but without selling this home or taking a new standard mortgage loan. In place of making regular monthly payments to a mortgagee (as it is in the case of an usual mortgage), a creditor makes monthly payments to you. The order of the payments is reversed and that's where the name of the reverse mortgage comes from. If you are wondering how do you pay back such a loan or some other questions are coming to your mind just continue reading and we hope you'll find their answers among the reverse mortgage information below.

In addition to the opposite way of payments, another interesting aspect of the reverse mortgage is that during the time you own and live in your home you do not owe any payments to the lender. The loan should be repaid only when you permanently move out of your home for whatever reason - it could be death, a sale of the home or anything else that cease your living there. So, your property is again a guarantee for your debt (as it is in the case of a regular mortgage) but the difference is that with the reverse mortgage you receive a loan consisting most often of regular (monthly) payments to you and return it as a lump sum at the end.

The idea of the reverse mortgage is to convert a part of a home equity into cash. This means that you may have an unpaid old mortgage against your home and still take a reverse mortgage for the available equity of your property. Except as regular monthly payments the cash can be received as a lump amount and even in the form of a credit line account that provides you with the possibility to decide how much of the money you need to get at a time.

In order the lender to be assured that your loan will be returnable, the amount you owe at any particular time cannot be greater than the available equity of your home. So, if the property happens to be sold and the proceeds of the sale are bigger than the owed amount, the surplus will go to you. On the other hand, in the unlikely event that the loan becomes more expensive than the value of the property, in most cases, the borrower won't be compelled to leave or sell his home since the reverse mortgages are usually insured.

Similar to regular mortgages, reverse mortgages are also bound with interest rates (fixed or adjustable). The interest is charged on the amount of money that you receive. Most often the rate is variable and tied to some index such as the 1-Yr. Treasury Bill plus a defined margin that usually adds 1 to 3 percentage points to the rate. Since the mortgage is reversed the interest is not paid out of the loan proceeds. Instead, it is accumulated over the loan life and paid at the time of the loan repayment. In addition to interest rates, there are also various applicable fees (for example, closing fees) and it may sound strange but in the reverse mortgage world it happens sometimes that the creditor covers the financing of all applicable fees.

The amount of money you can receive against a reverse mortgage depends on your age, the value of your home, interest rates and eventually some specific limits for your local area. The older you are or the more valuable your home is, the more money you can get. As it has been already discussed, if you have an existing mortgage to be paid off you still may qualify for a reverse mortgage loan and practically, its amount does not depend on the existing amount you owe. So, the amount degree depends just on the factors mentioned above but you should have in mind that any existing debts must be paid off in order to receive the new loan (if you don't have other money to spend you may use part of the new loan in order to repay the old one).

To take a reverse mortgage can be a good option in many cases but sometimes it's better to consider other variants. If you plan to move out of your home in the next couple of years or if you want to leave your property to your children you better go after another (in many cases less expensive) option. You may also consider a standard mortgage refinancing approach in case of problems with your existing mortgage instead of getting a reverse mortgage. Anyway, if you decide to choose a reverse mortgage, only your imagination is the limit of how can you use the money coming from the loan. You may use them for almost anything - to pay off an existing debt, to cover daily expenses, to go on a vacation, etc.

In case, there have been some unclear terms in the above article you can look for help in our mortgage terminology section. Please, do not consider this article as a legal advice. You should always search for a good counsel from a professional when some kind of mortgage is concerned.


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