So how does a Reverse Mortgage Work? A reverse mortgage is a loan that allows homeowners who are 62 years of age or older to borrow money against the equity in their home. The borrower retains the ownership of the home and can continue to live in it as long as they wish.
The loan does not have to be repaid until the borrower sells the home or permanently moves out. The borrower is still responsible for paying property taxes, insurance, and maintaining the home in good condition. The loan is typically paid back by selling the home, if the borrower moves out or passes away. The borrower or their estate will receive any remaining proceeds from the sale of the home after the loan is paid off.
How Does a Reverse Mortgage Work Example
Here is an example of how a reverse mortgage works:
John is a 68-year-old retiree who owns a home in Kansas City valued at $300,000. He has no mortgage on the home and has built up significant equity in it over the years. However, he is living on a fixed income and is having trouble making ends meet.
John decides to explore the possibility of a Kansas City reverse mortgage. He contacts a HUD-approved counselor and a lender, who explain to him that a reverse mortgage is a loan that allows him to borrow money against the equity in his home. He can use the money for anything he wants, such as paying off credit card debt, funding home repairs, or supplementing his retirement income.
John decides to proceed with the reverse mortgage and applies for a loan. He is approved for a loan of $200,000, which he can access in a lump sum, as a line of credit, or in the form of monthly payments. He decides to take a line of credit, which he can access as needed.
John uses the money from the reverse mortgage to pay off his credit card debt and make some home repairs. He also uses some of the money to supplement his retirement income, which makes it easier for him to afford his daily expenses.
John continues to live in his home and is not required to make any monthly payments on the loan until he sells the home or permanently moves out. He continues to be responsible for paying property taxes, insurance, and maintaining the home in good condition.
When John sells the home or permanently moves out, the loan becomes due and the lender will sell the property to repay the loan. Any remaining proceeds from the sale of the home will go to John or his estate.
It's important to note that the specific terms and conditions of a reverse mortgage can vary depending on the lender and the borrower's specific circumstances. Additionally, a reverse mortgage loan accrues interest and the loan balance grows over time, which may have an impact on the equity of the home. It's important to consult with a financial advisor and a HUD-approved counselor before deciding if a reverse mortgage is the right option for you.
How Does a Reverse Mortgage Work When You Die
When the borrower of a reverse mortgage dies, the loan becomes due and payable. In most cases, the loan is paid off by selling the home. The home is sold and the proceeds are used to pay off the outstanding loan balance. Any remaining proceeds from the sale will go to the borrower's estate.
If the borrower's spouse or other heirs wish to keep the home, they have a few options:
They can pay off the outstanding loan balance with other funds, such as savings or by obtaining a new mortgage.
They can refinance the property, either with a conventional mortgage or another reverse mortgage.
They can sell the property and use the proceeds to pay off the loan.
It's important to note that if the home is worth less than the outstanding loan balance, the heirs will not be responsible for paying the difference. Also, if the borrower's heirs wish to keep the home, they will be responsible for paying property taxes, insurance, and maintaining the home in good condition.
It's important to note that in some cases, the loan may be insured by the Federal Housing Administration (FHA) and the FHA insurance may pay off the remaining balance of the loan when the borrower dies. It's important to consult with the lender and a HUD-approved counselor to understand the specific terms and conditions of the loan and the options available to the borrower's heirs.