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How Does A Reverse Mortgage Work?

how do a reverse mortgage work

Insured by the Federal Housing Administration of the U.S. Department of Housing and Urban Development, a Home Equity Conversion Mortgage or “Reverse Mortgage” is specifically designed to meet the needs of senior homeowners aged 62 and over.

Similar To A Conventional Mortgage In Many Ways.   Like a conventional mortgage, a Reverse Mortgage is a loan made by a lender that is secured by the senior homeowner’s primary residence.  A Reverse Mortgage does not involve a sale transaction or transfer of ownership of any kind.  Neither the bank nor the government own your home; you continue to home your home just as you always have.

Funds Can Be Used For Any Purpose.   The funds provided by a Reverse Mortgage can be used for any purpose after paying off any existing mortgage, home equity line of credit or other lien against the home.  Any judgments against the homeowner must be paid off as well.  In many cases, credit cards and other fixed payment obligations are paid at closing as well.

Typically, the money provided by a Reverse Mortgage is used to make repairs to the home and to help pay for property taxes.  Often, part of the money received is set aside for unexpected emergencies in the future and to pay for healthcare needs.  But there are no restrictions on the use of funds provided by a Reverse Mortgage so you can allocate the funds as you see fit.

Reverse Mortgages can also be used to purchase a home.  In a purchase transaction, the Reverse Mortgage provides funds that are combined with the borrower's own funds to pay the purchase price to the seller at closing. 

Many seniors use the Reverse Mortgage funds to relocate or to purchase a home that is better suited to their needs.

Provides Payment Flexibility.   A Reverse Mortgage provides the payment flexibility you need as a senior homeowner.  In fact, you are not obligated to make any ongoing payments to the lender, provided other obligations are satisfied.  As a result, you are free to allocate your disposable income as it best suits your needs.

With a Reverse Mortgage, you can also make payments just the way you did with your conventional mortgage or home equity line of credit if you want to, and if you begin making payments, you can stop at any time.  Also, you can pay off the Reverse Mortgage in part or in full at any time you want without penalty.

Many seniors think a Reverse Mortgage sounds “too good to be true.”  However, a Reverse Mortgage is not “free money.”  The lender must be paid back if you sell your home or when the last surviving borrower dies or no longer resides in the home as his or her primary residence.  At that time, any deferred interest is also paid to the lender.  That’s how the lender makes money by making the loan to you.

Interest accrues on a Reverse Mortgage just the way it does with a conventional mortgage.  The amount of interest is based on the interest rate on the loan applied to the outstanding principal balance on an ongoing basis.  Moreover, as with any mortgage loan insured by the Federal Housing Administration, a Reverse Mortgage includes a Mortgage Insurance Premium paid at closing and accrued on an ongoing basis.

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