Reverse Mortgage – How Does It Work?

by | Sep 18, 2015 | Financial Service

If you are like many, you have thoroughly researched various ways to supplement your retirement income or to get a loan using your home. Mortgage loans are helpful, but they must be paid back sooner rather than later. You may have heard about reverse mortgages, but may still wonder how it works. You can get a line of credit or a fixed monthly payment without repaying for a very long time, which is why they are popular. However, before jumping in and deciding to go this route, it’s best to learn more about it.

Traditional Mortgages

Traditional, or forward, mortgages, allow you to borrow money from the lender, make monthly payments to help pay down the balance (interest and principle), and build equity in the home over time. This means that the debt will decrease, and the home equity will increase, so when the mortgage is fully paid, you’ll own your home and have full equity.

Reverse Mortgages

Reverse mortgages work differently because you don’t make monthly payments to the lender, the lender makes those payments to you. Of course, it is based on the value of the home and other factors, but you, in essence, get paid for living there. You can choose to have all the money at once, a line of credit opened or get a monthly cash advance each month. You may also change your method at any time.

Interest

Interest will accrue on the loan, but only on the amount of money you receive. You can find both variable and fixed rates though most are through variable interest rate loans. The interest will compound over the life of the mortgage until it is time to repay.

Loan Progression

Throughout the life of the loan, your debt will increase, and your home equity will decrease. Once you pass away, sell the house or move out, the lender will sell the house to recover some of the money you owe. After they cover their fees, you or your heirs will get any leftover equity. Even if you get more money than what the home is worth, you won’t owe more than your home’s value.

When To Repay

You will not have to repay the loan if you live in the house until death though loved ones may be required to pay it back. You will have to repay if you move to a nursing facility or otherwise decide to move out.

If you’re wondering how a reverse mortgage works, you aren’t alone. Many people are considering it as a way to supplement income and pay off debts. Visit RMFS (Reverse Mortgage Finance Solutions) today to find out about services.

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