How does a reverse mortgage work?

Designed for seniors, a reverse mortgage is a loan that allows the homeowner to convert some of the equity in their home into cash or monthly income, while retaining home ownership. Reverse mortgages work much like traditional mortgages, only in reverse. Rather than making a payment to the lender each month, the lender pays the borrower. All persons on the title must be at least 62 years old and occupy the home as their principal residence. You must own your home "free and clear" or have a very small mortgage balance. Income is not required to qualify. Reverse mortgages do not have to be paid back until the last surviving borrower dies, sells the home, or moves out. The total amount owed at the end of the loan equals all of the cash advances you've received, plus the accrued interest.

Reverse mortgages also work in a purchase transaction. You can purchase a home without making a single monthly mortgage payment. This option allows seniors to move close to family when the need arises. There are various ways seniors can benefit with a reverse mortgage including receiving additional tax-free monthly income or a lump sum payment, canceling a current mortgage payment, funding long term care insurance and in-home care, renovations and repair work to their homes.

A reverse mortgage can be an excellent way to supplement income for those on a fixed income.
The payments you receive will typically not impact your Medicare, or social security eligibility making this an excellent option for people needing a little extra money in the golden years.

One additional note about reverse mortgages. The payments you receive from the lender is equity from your home. Therefore, you do not have to pay taxes on payments you receive.

Reverse mortgages can be utilized in one or a combination of three ways. Option 1 is to take a lump sum. Option 2 is to take monthly payments. As mentioned previously, you will receive those payments until the homeowner on the note passes away or sells the house. The third option is currently the most popular. That option is a line of credit. Similar to the lump sum, you have access to the funds at any time. The big benefit to this option is you actually accrue interest on the funds over time and seniors on fixed incomes would not be penalized for carrying a large account balance like they might if they chose the lump sum.

One popular misconception about reverse mortgages is that the home owner gives up title to their home. This is simply not true. At no time does the home owner using a reverse mortgage give up title to their home.

Ask your mortgage professional to prepare a printout showing your various options for a reverse mortgage. This detailed analysis will show your equity position on your property over time as well.

» DISCLAIMER: The information contained in this article on 'How does a reverse mortgage work?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.