What is a Reverse Mortgage and How Do I Qualify?

There has been a lot of publicity lately about the availability of reverse mortgages, but many people do not understand what a reverse mortgage is or how one works. This article attempts to explain the basics of a reverse mortgage and if it may be a good option for you.

A reverse mortgage is a special option only available to senior's age 62 or older. With a reverse mortgage you are basically getting a loan based on the equity in your home. The main difference between a reverse mortgage and a traditional mortgage is that the reverse mortgage makes payments to you, instead of you making payments to a lender.

The equity that you have established in your home will continue to shrink as you accept payments from the reverse mortgage lender.

You can choose between receiving monthly payments and getting a large lump sum to cover large unexpected expenses. In fact, you can set up the amount and frequency of payments that you receive from the reverse mortgage in just about any way that will best suit you and your needs.

Unlike a traditional home mortgage, a reverse mortgage will continue to grow as you continue to take payments. Instead of the amount that you owe shrinking each month, the amount you owe will grow over time. You will also be required to pay interest on the reverse mortgage and lender fees.

The total amount that you can get from a reverse mortgage is based upon the market value of your home. The amount that you receive from your reverse mortgage will never exceed the market value of your house.

When do you have to repay the reverse mortgage?

You will have to repay the reverse mortgage, plus interest and lender fees, when you sell the house. Keep in mind that since the amount of the reverse mortgage is lower than the market value of your home, you should have no problem repaying the reverse mortgage in full once you sell your house.

If you die before repaying the reverse mortgage off, the loan will be due and your heirs will be responsible for selling the house and using the proceeds to repay the loan. Even if the amount you borrowed eventually exceeds the value of your home, you or your heirs will never owe more than the value of your home. If your home is worth more than the amount that is owed on the reverse mortgage, the excess will go to your heirs, not the lender.

A reverse mortgage is not for everyone, and there are many requirements that you must meet before being eligible for one. The first requirement is that you, and any co-borrower, be at least 62 years of age. Next, you should either own your home outright, or have a very low mortgage balance. Owning your home, and not having a mortgage balance is the best scenario for receiving a reverse mortgage. However, if you have enough equity in your home and a small balance left on your mortgage, you could still take advantage of a reverse mortgage and still be making a smart financial decision.

Additional general requirements state that you must occupy the house as your primary residence. You will be responsible for the property taxes, keeping the house maintained, and maintaining homeowners insurance on the residence. These are just a few of the requirements that most lenders require; your individual lender may have additional requirements.

Most reverse mortgage loans will allow you to alter the payment options that you are receiving. Generally you can pay off the reverse mortgage early or pay off a portion of the reverse mortgage early with no penalty. Probably the best thing about a reverse mortgage is that you, nor your estate, will ever owe the lender more than the market value of your home. If you take out a reverse mortgage, you will not be leaving your heirs with a large debt that cannot be covered by selling the house.

If you are interested in a reverse mortgage, then you should read up more about the process and the requirements to qualify for the reverse mortgage. There are even reverse mortgage calculators that can estimate the amount that you will receive against the value your home.

While a reverse mortgage may not be for everyone, it is an excellent tool to help elderly Americans keep their finances in order after they have passed retirement age.