How Do Reverse Mortgages Work

If you are seeking to understand “How do reverse mortgages work?” you are probably contemplating one right now.

So to give you all of the information you need, I am going to walk you slowly through the process, giving you links on this website to other pertinent information as well as all the necessary information so that you can make a correct decision as to whether or not this is the right financial tool for you.

What Are Reverse Mortgages?

First of all, a reverse mortgage works, as the name implies, exactly the opposite of a conventional mortgage.

With a conventional mortgage, like the one that you used to purchase your home, you had to qualify for a mortgage, based upon your income and credit history, and then you made payments to the mortgage holder…probably for 30 years…until the mortgage was paid off.

Now…let’s fast forward thirty years or so in the course of your life.  Your mortgage is paid off…or is almost paid off.  You have plenty of equity in your home, but if you are like many boomers becoming seniors, you don’t have that much in the way of retirement assets.  

how do reverse mortgages work

After all, a recent Money Magazine article stated that the average baby boomer had about $72,000 in retirement assets…BEFORE the recession started in 2007.

So how are you supposed to live for the next 20-30 years?

You could continue working, but many who are in their 60’s are physically at the point where they need to start slowing down…not speeding up.

Social Security?  Didn’t think so.  Between it going broke and only paying a pittance to begin with…Social Security is not the answer.

This is where a reverse mortgage CAN POSSIBLY  come in handy.  I emphasize the POSSIBLY because everyone’s situation is different and you need to be aware of the potential pitfalls to reverse mortgages as well.

How Do Reverse Mortgages Work?

The way that the reverse mortgage works is that you are tapping the equity in your home to allow yourself to live independently.

You will receive a payout from the bank…whether through a lump sum or via a payment plan…and never have to pay the money back while you are living in the house.  There are no credit or income checks to qualify for a reverse mortgage.

The amount of money you will receive from a reverse mortgage are based upon two things…

  • How old you are [the older you are the more money you will receive]
  • The value of the home

That’s it.  In addition, when applying for your reverse mortgage MAKE SURE THAT THE LOAN IS NON-RECOURSE.  Most are but check anyway.  Non-recourse means that you can never owe more than the house is worth.

Other Factors

The most important part of the process…designed to protect seniors from scams…is the mandatory counseling session, where you will sit with an unbiased counselor who will review all of the particulars of the loan and them make recommendations to you such as…

  • Whether or not you are paying too much in closing costs.
  • Whether the payout option you have chosen is the best for you.
  • If there is a cheaper alternative than a reverse mortgage available to you.
Rely on this information.  It can come in very handy in helping you truly find out if you are making the best decision for you.  
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