While discussing the basics of a reverse mortgage, it is important to understand how it works. This article explains how a reverse mortgage works in practice.
A reverse mortgage is a loan. Unlike a regular mortgage, it is a loan taken not to buy a home but on the home. The reverse mortgage is a loan given with the home owned by a person as the collateral.
Who can take it?
A reverse mortgage is a loan that can be taken by a homeowner aged 62 or more. Elderly people who have a home but no source of income can opt for this. They can get the money by reverse mortgaging their home. They can use the money for their expenses. The money is tax-free.
The best part of a reverse mortgage is that it need not be repaid immediately. Interest and other fees are added to the loan, and the money needs to be repaid when the homeowner dies, sells the home, or moves away from the home.
Every year the homeowner is required to confirm that he/she continues to stay at the home. If he vacates the home, then the mortgage amount with interest and charges has to be repaid.
Receiving the money
There are different ways in which the homeowner can opt to receive the money sanctioned through the reverse mortgage. The different ways include:
- Lump sum amount: The entire amount is paid at one go. When this option is selected, the interest rate is fixed and specified in the contract.
- Annuity: The annuity mode allows for equal payment every month. This effectively works like a pension where the homeowner gets money monthly for expenses.
- Term payout: Here, payment is given over a term as agreed in the contract. Eg: monthly payments may be paid for a total of 5 or 10 years.
- Line of credit: In this method, there is no money paid out but a line of credit is approved. Whenever the homeowner wants, he/she can borrow and repay only the amount borrowed.
- Annuity and line of credit: This has two benefits and a homeowner can get a fixed amount every month. Apart from this, an additional amount can be borrowed using the line of credit when needed. In this method, the monthly payout will be lesser.
- Term payout and line of credit: Here, monthly payout is given every month for a specific term. After that term, a line of credit is available to borrow more money, if needed.
The home is first appraised to find its value. A session conducted by the Department of Housing and Urban Development needs to be attended to understand the pros and cons. A person is free to apply to any lender.
The lender may insist on verifying credit score and ascertain if the homeowner can maintain the home to ensure its value doesn’t reduce. The amount paid will be less than the value of the home.