What is a Reverse Mortgage and is it Right for You?

What is a reverse mortgage?

Hardly a day passes without hearing an advertisement for a reverse mortgage, but while you may be familiar with the term, we doubt you’re familiar with what a reverse mortgage actually is. With our older populations growing it will be more important than ever to make sure their golden years are actually golden.

A reverse mortgage is an option for those 62 and older who own their home outright or have a lower mortgage balance that can be paid off at closing with the proceeds. With a reverse mortgage, the lender is buying the house FROM you and they make a payment every month to you.

What is a Reverse Mortgage?

Traditional Mortgage

With a traditional mortgage, what’s really happening is the lender buys the house FOR you and you make payments to them on the principal and interest until you fully buy it. Even though the lender technically owns the home until you pay it off, you move in right away and live there.

Monthly Payment

Once the loan and monthly payment amount are established, you will receive that payment and be free to stay in your home as long as you live, even if the loan paid to you exceeds the value of the house. After the owner passes away, the lender calculates the loan amount they paid plus interest, then sells the property.

Sale of Property

If the proceeds from the sale of the property do not cover the loan balance plus interest, the heirs are only obligated to pay the value of the home based on FHA guidelines, which is often 95% of the appraised value.

Is a Reverse Mortgage Right for You?

It depends. If you’re struggling to survive every month with your retirement/social security/disability, can no longer work, and have no other options for income, a reverse mortgage will allow you to receive a monthly income and may be right for you.

Home Equity Line of Credit – Another Option

If you have a short-term need but can otherwise manage your monthly expenses, a Home Equity Line of Credit (HELOC) might be a better option for you. Both a HELOC and reverse mortgage use your homes equity to decide the loan amount, and thus the interest rates for both are very similar.

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