A reverse mortgage is a loan created for homeowners who are 62 or above 62. The loan enables people to transfer part of the equity in the house into cash without giving up the ownership.
The loan is mainly used to help retirees with limited income by using the accumulated wealth in the house to cover the basic living expenses per month. With the reverse mortgage, homeowners do not have to pay any payment.
How does a reverse mortgage work?
Unlike other mortgages, it is the lender of the reverse mortgage that makes the payment. As the homeowner borrows a reverse mortgage, he or she has an option to decide the way the payments will be received. Common ways of receiving the proceeds include the lump sum, term payments, line of credit, tenure plans, and so on.
Though borrowers are supposed to pay the interest on the proceeds, since the interest is included in the loan balance, nothing will be paid by the homeowners.
During the loan, the homeowner’s home equity will decrease whereas the debt will increase. Meanwhile, borrowers always keep ownership of their houses. Once the borrower moves away or dies, the proceeds generated from the house’s sale will go to the lender. Therefore, the lender will repay the principal, interest, mortgage insurance as well as other fees of the reverse mortgage.
If the homeowner is still alive, he or she may be able to receive the excessive sale proceeds. If the borrower has already passed away, sometimes the heirs can choose to keep the house by paying off the mortgage.