How Does A Reverse Mortgage Work

Section 2. How Does A Reverse Mortgage Work

Reverse mortgages are really reverse mortgage loans. You actually borrow money and use your home as collateral to secure the loan. But, unlike a regular mortgage loan, you do not make regular payments. Instead, the money is paid back when you stop living in your home. Here's how they work:

When you apply for a reverse mortgage, your mortgage lender will calculate the maximum amount that you are eligible to borrow. This maximum loan amount is based on the value of your home, the age of the youngest borrower, and the expected interest rate.

After your reverse mortgage loan is approved, there is a regular mortgage "closing" where you sign a promissory note, mortgage or deed of trust, and other necessary documents. You will receive a truth in lending statement and a projected payout statement showing what amounts and when the mortgage lender expects to pay you the money that you are borrowing. Federal law requires that you have 3 business days after "closing" to cancel the transaction in case you change your mind and decide that you do not want the reverse mortgage.

Next you receive the money that is loaned to you and you can receive the money in several ways.

     - You may elect to receive the money on a monthly basis (a payment each month). This is a good option if you need to supplement your income.

     - You may elect to receive a lump sum. This is a good option if you need to have repairs made to your home, but lack the money to pay for the repairs.

     - You may elect not to receive any money right now, but simply have the money available in the future if you need it. This option is like a credit line and helps relieve the worry about how to pay for emergencies in the future.

     - You may elect to combine the options. For example, you may want to receive less than the maximum amount in a lump sum now and then have a line of credit for the balance to be used in the future.

With a regular loan, the next thing would be for you to start making payments repaying the loan. However, with reverse mortgage loans you are not required to make any payments until its' end regardless of how you chose to receive the money and the amount of money that you receive.

The lender keeps track of the amount of money that you receive. Each month, the lender adds interest to the amount of money that you receive and calculates the new debt amount. The more money that you receive and the longer that you have it, the greater the amount of debt.

When you sell your home, move away, or upon your death, the loan (amount of money received plus interest) becomes due and payable. If you sell your home, you simply pay off the reverse mortgage loan from the sale proceeds and keep the balance. If you move away, you will need to pay off the reverse mortgage or else your lender can foreclose (your lender cannot foreclose as long as you live in your home). If you die, your home will pass according to your Last Will And Testament or state laws, whichever is applicable. Your heirs can either pay off the reverse mortgage loan and keep your house, or they can sell your house, pay off the loan, and keep the balance.

This ebook is for general information only and may or may not be applicable to your situation. If you have any questions whatsoever, talk with a mortgage broker or lawyer licensed in your state.

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