What you need to know about Reverse Mortgages

A reverse mortgage goes against the common understanding of what a mortgage is supposed to be and this makes it a difficult concept to grasp. Take a look at the following questions and answers as they try to clear up the definition and basic information surrounding reverse mortgages.

What is a Reverse Mortgage?

A reverse mortgage is actually a loan that you take out against the equity in your home. It is called a “reverse” mortgage because the money flows in the opposite direction. The lender presents you with a lump sum payment or with monthly installments based on certain factors including the value of your home.

To qualify for a reverse mortgage you must be at least 62 years of age and if you are married both parties must be 62 or older. There are no income restrictions but the home must be your primary residence to get a reverse mortgage.

How Much Can You Get?

Typically you can borrow up to half of your home equity, but the actual amount you qualify to borrow depends on your age, the value of your home and interest rates. This is one time when age is certainly not a disadvantage. As a matter of fact, the older you are, the more you can borrow, up to a cap of $625,000 but of course your home’s value also has a significant part to play in this.

You can take the money as a lump sum or as a series of equal monthly installments. In most cases taking the money in installments is the better option because as soon as it is withdrawn the money starts to accrue interest.

How is a Reverse Mortgage Repaid?

A reverse mortgage is only repaid when you plan to move out of the home or the balance on the loan automatically falls due if you pass away.

What are the Disadvantages?

If the idea of getting paid to live in your own home seems too good to be true, remember that this is still a loan. The funds should not be withdrawn to be used in a fickle way because it reduces the value of your estate. For those who want to leave something for heirs to inherit this can be a real disadvantage. A reverse mortgage is also not a great idea if you plan to stay in your home for less than seven years because there are costs associated with putting the loan into place.

A reverse mortgage may be the answer to your income shortfalls, but it is always advisable to take all your options into consideration before making a decision.