How Does A Reverse Mortgage Work

If you are reading this, you probably already know what a reverse mortgage is and want to know how does a reverse mortgage work?

Reverse mortgages are really reverse mortgage loans. You actually borrow money, but do not pay the money back as long as you live in your home. Here's how they work:

A mortgage lender calculates the maximum amount that you are eligible to borrow. This amount is based on the value of your home, the age of the youngest borrower, and the expected interest rate.

Next you receive the money that is loaned to you. 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.

Regardless of the option you chose to receive the money or the amount of money that you receive, you do not make any payments.

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.

The question always comes up: "Since I am not making payments, what happens if I owe more than my home is worth?" First, when a mortgage lender calculates the maximum amount that you can receive from the loan, the lender automatically builds into the maximum amount a "fudge" factor so that it is unlikely that you will ever owe more than your home is worth. However, if you have a long life, it is possible to owe more than your home is worth. Second, regardless of the amount owed, your reverse mortgage lender is limited to seeking payment of the loan from the value of your home. Even if you owe more than your home is worth, your lender cannot seek to collect from either you or your heirs.

This is general information only. If you have any questions about reverse mortgages, talk with a mortgage lender, and if you have any legal questions, talk with a lawyer licensed in your state.

Stop! Wouldn't you like to know if a reverse mortgage is right for you? Get more information here on a Reverse Mortgage. And click here for more insights on Dangers Of Reverse Mortgages.

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