What Does Reverse Mortgage Means and How Does It Work?
A reverse mortgage is, in a nutshell, a loan given by reverse mortgage lenders.
A 62-year-old homeowner with significant home equity can borrow against the value of their property and receive funds in the form of a lump sum, a fixed monthly payment, or a line of credit.
A reverse mortgage, unlike a forward mortgage, which is used to purchase a home, does not require the homeowner to make any loan payments.
Instead, when the borrower dies, moves out permanently, or sells the house, the entire loan debt becomes due and payable.
According to federal regulations, lenders must structure transactions so that the loan amount does not exceed the home's value. The borrower or borrower's estate will not be held liable for the difference if the loan total exceeds the home's value.
A decrease in the home's market value is one way; another is if the borrower lives a long time.
The Equity in Cash
For seniors whose net worth is mainly related to the value of their property, reverse mortgages loans might provide much-needed cash.
On the other hand, these loans can be costly and complicated, as well as vulnerable to fraud.
This article will explain how reverse mortgages operate and how to avoid the problems so that you can make an informed decision about whether a reverse mortgage is good for you or your parents.
According to the Reverse Mortgage Lenders, in the first quarter of 2019, homeowners aged 62 and over had $7.14 trillion in home equity.
This figure has been high since the survey began in 2000, demonstrating how vital home equity is as a source of wealth for retirees.
Home equity can only be used if you sell and downsize your home or borrow against it.
Reverse mortgages can help retirees with limited income and assets.
It is a loan that is available to seniors aged 62 and up. With a reverse mortgage, homeowners may turn their home equity into cash income without making monthly mortgage payments. Although most reverse mortgages are federally insured, there has been a recent rash of reverse mortgage frauds aimed at the elderly.
For some people, reverse mortgages are a wise financial decision, but they are a bad one for others.
Before deciding anything, be sure you understand how reverse mortgages work and what they entail for you and your family.
Instead of the homeowner making payments to the lender, the lender pays payments to the homeowner with a reverse mortgage.
The homeowner can receive these payments in a variety of ways and only pays interest on the amount received.
The homeowner does not pay anything upfront because the interest is rolled into the loan total.
The homeowner also retains ownership of the property.
Throughout the loan, the homeowner's debt grows, and their equity shrinks.
A reverse mortgage, like a forward mortgage, is secured by the home. The profits from the home sale go to the lender to repay the reverse mortgage's principal, interest, mortgage insurance, and fees when the homeowner moves or dies. Any earnings from the sale that exceed the amount borrowed to go to the homeowner (if they are still alive) or the homeowner's estate (if the homeowner has died).
In rare circumstances, heirs may elect to pay down the mortgage to maintain the house. The proceeds of a reverse mortgage are not taxable. While the money may appear to the homeowner as income, the IRS considers it a loan advance.