How A Reverse Mortgage Works

Although there are many mortgage options now being offered to potential homebuyers, one that has received a lot of attention is the reverse mortgage. The United States Department of Housing and Urban Development, also known as HUD, is currently being inundated with questions with a large number of people asking “what is reverse mortgage?”

In answer to “what is reverse mortgage”, this is actually a private type of loan but one that is insured by the federal government. What makes a reverse mortgage unique is that a portion of the equity in the home is converted to cash, which can then be used by the homeowner in whatever way they see fit. Because qualifications and restrictions are associated with a reverse mortgage, it is used by the elderly, many times as a means of financial security.

One of the main values when it comes to what is a reverse mortgage is that the homeowner’s income is not checked or even considered. This means the person could have very little or even no income and still qualify for a reverse mortgage loan. Of course, as with any mortgage, there are various dynamics that are looked at by the lender in making the final decision on approval.

Other important information that goes along with the question “what is reverse mortgage” is that the homeowner can choose the way in which the funds are distributed. For instance, money can come to the homeowner as a monthly payment, a lump sum, a specified line of credit, or any combination of the three. The most critical piece of information is that the mortgage on the home is not paid until after the homeowner passes away, moves, or sells the residence.

Along with the question of what is reverse mortgage, interested parties should understand the advantages and disadvantages associated. Some people view a reverse mortgage as a godsend while others see it as a potential risk. The best advice is to learn all you can so any decision is an educated decision.

The Up Side

The first good thing in response to what is a reverse mortgage and is it a good choice is to know that the funds coming from the home’s equity can be used in whatever way the homeowner prefers. This means the money could be used to take vacations, add on to or improve the home, send a child or grandchild off to college, pay off bills, have surgery, etc.

Another advantage of a reverse mortgage is that all the money being taken out against the equity is completely tax free and, there are zero restrictions on income. This means if the homeowner is bringing in only a small amount of money each month on which to live, or has no income at all, he or she would still qualify to use money from the equity.

Until the time comes when the homeowner moves, sells the property, or passes away, not having to have pay the money back is a huge blessing. Now, if there were family members in the homeowner’s will, once the homeowner passes away, the reverse mortgage could be refinanced. The key here is that with several variations for this type of mortgage, anyone interested needs to consider all options before signing on the dotted line

Finally, if the homeowner were to pass away, any heirs would have the legal option to refinance the loan to that of a more traditional loan. However, there are variances of the reverse mortgage so is inheritance issues are important to the homeowner, these options need to be reviewed and analyzed carefully.

Negative Aspects

Unlike more traditional mortgages, a reverse mortgage is generally expensive to secure. Some of the reverse mortgage rates include application fees, insurance, closing costs, appraisal, and in some cases, a monthly fee for the loan being managed by the lender. This in addition to the continuance of other home fees such as insurance, tax, repairs, homeowner association dues, and so on would need to be considered too.

The final aspect that goes with the question of what is a reverse mortgage and is it a good choice has to do with the condition of the home, which could make or break the deal. Lenders want to see sound construction and the home in good repair. The positive side of this is that if repairs are needed to complete the reverse mortgage process, then any costs could simply be rolled into the mortgage.

For many people, the value of what is a reverse mortgage far outweighs any potential risks. While this can be an excellent option, anyone going this route needs to have a clear and full picture of what is expected. That way, if you have done your research and have done your reverse mortgage quote comparison, as time goes on, there are no unpleasant surprises. Remember, the staff at HUD is always available to help in any way possible so take advantage of their service.