Explanation of Reverse Mortgages

Reverse mortgages allow older homeowners to borrow money from a bank and in turn give that bank some of the equity in their home.  The amount of money they can borrow from the bank is based upon how much equity they have in their home; the more of the home they own, the more money a homeowner can borrow. 

The explanation of reverse mortgages is actually pretty simple:

• Basically a homeowner borrows back the money he or she has already paid on the home, and then the bank owns equity in the home equal to what the homeowner has borrowed. 
• The loan is paid back when the homeowner sells the home or dies; typically the proceeds from the sale of the home generate the money to pay back the reverse mortgage loan.

Qualifying for a Reverse Mortgage

The qualifications for obtaining a reverse mortgage are minimal. 

• Obviously you must own a home, and you must have a certain amount of equity in that home to qualify for the loan. 
• The other qualification is that these loans are only available to people who are 62 or older.  The idea behind this is that it can allow older homeowners, many who may be retired and no longer receiving a regular paycheck, another source of income. 
• Reverse mortgages can be obtained on single family homes, 2-4 unit properties, mobile homes that were built after 1976, townhouses, and  condominiums. 

How Reverse Mortgages Are Paid Out

No explanation of reverse mortgages would be complete without details on how the money is actually paid out to those who take out such a mortgage. Borrowers can receive the loan money in a variety of ways:

• It can be given in monthly payments, either for a set number of months or for as long as a borrower lives in the home. 
• It can also be taken in one lump sum, or used as a line of credit. 

The most common way homeowners use the money is as a line of credit, meaning that the money is always available and borrowers can use it as they need it. 

What Can You Do with the Money?

• The income from a reverse mortgage can be used for anything. 
• Some people use it simply as supplemental income to help cover living expenses. 
• Others obtain reverse mortgages for health reasons and use the money to make repairs or modifications to their home, such as making it wheelchair accessible, or to pay medical bills. 
• The money can also be used to splurge on vacations or a new car, or to pay off other existing debts.

Interest on a Reverse Mortgage

Just like any other loan, reverse mortgages earn interest. 

• The interest is based on an index, and accrues on the money that homeowners borrow as they withdraw money from the loan. 
• This interest is not paid off along the way, but compounds until the loan is repaid. 

Reverse mortgages may be a good option for homeowners who don’t want to pass their homes onto their children or anyone else, because most likely proceeds from the sale of the home will be needed to repay the loan at some point.