A Simple Explanation Of How Reverse Mortgages Work

A reverse mortgage can be an effective way to supplement retirement income or pay off debts, but it’s not right for everyone. Before you consider how reverse mortgages work, it’s important to understand the basics of how they operate. A reverse mortgage requires homeowners to be at least 62 years old and living in their primary residence with no mortgage balances or outstanding liens against the property. The amount of money you receive from your lender will depend on several factors, including the age at which you apply, the value of your home and your interest rate. Here is a simple explanation of how reverse mortgages work.

A Simple Explanation of How Reverse Mortgages Work

Why Do You Need a Reverse Mortgage?

A lot of people over the age of 62 find themselves in a situation where they own their home outright, but don’t have a lot of extra money to live on. A reverse mortgage can provide that extra income and allow you to stay in your home. Since it is a loan against your home that you don’t have to pay back for as long as you live there, it is beneficial for those with financial restrictions. The loan is repaid when the house is sold, either when you die or move out.

How Much Money Can You Get from a Reverse Mortgage?

The amount of money you can get from a reverse mortgage depends on your age, the value of your home, and the interest rate.

Is it Legal?

Yes, reverse mortgages are legal in the United States. The Federal Housing Administration (FHA) insures most reverse mortgages through its Home Equity Conversion Mortgage (HECM) program.

What to expect from an HECM Loan

If you are 62 or older and own your home outright, or have a low mortgage balance, you may be eligible for a reverse mortgage. With a reverse mortgage, you can borrow against the equity in your home without having to make any monthly payments. The money you borrow can be used for any purpose, such as supplementing your retirement income, paying off medical bills, or making home improvements. To qualify for a reverse mortgage, you must first undergo a financial assessment to make sure that you can afford the loan. You will also be required to get counseling from an independent organization to ensure that you understand the terms of the loan and the implications for your finances.

What is the Home Equity Conversion Mortgage (HECM)?

The Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage that’s insured by the Federal Housing Administration (FHA). This makes it different from a traditional reverse mortgage, which isn’t insured by the government. With a HECM, you can borrow against the equity in your home. The amount you can borrow depends on your age, the value of your home, and the interest rate. You don’t have to make any monthly payments on the loan as long as you live in your home. When you die or sell your home, the loan must be repaid.

Who should NOT use a reverse mortgage?

While a reverse mortgage can be a great tool for some, it's not right for everyone. Typically, those who shouldn't get a reverse mortgage are:

• People who don't intend to stay in their home for the long haul. The whole point of a reverse mortgage is to provide income during retirement, so if you're planning on selling your home soon, it doesn't make sense to get one.

• People who have heirs who want to keep the family home.

What are some risks involved with this loan?

With a reverse mortgage, you are essentially borrowing against the equity in your home. This can be a risky proposition if the value of your home decreases, or if you fail to make payments on the loan. If either of these things happen, you could end up owing more money than your home is worth. Additionally, reverse mortgages typically have high fees and interest rates, which can further eat into your equity.

Are there tax implications with a HECM loan?

There are no tax implications with a HECM loan. The loan is not income and will not be taxed as such. The loan is also not considered a gift, so there are no gift taxes applicable. However, the interest on the loan may be taxable depending on your personal tax situation.

How to get more information about this loan?

If you're interested in learning more about this type of loan, contact a HUD-approved housing counselor near you.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.