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How Does A Reverse Mortgage Work?

A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that you built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, reverse mortgage borrowers do not have to repay the reverse mortgage loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. You can also use a reverse mortgage to purchase a primary residence if you are able to use cash on hand to pay the difference between the reverse mortgage proceeds and the sales price plus closing costs for the property you are purchasing.

1. Can I qualify for a reverse mortgage?
To be eligible for a reverse mortgage, you must be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are also required to receive consumer information free or at very low cost from a reverse mortgage counselor prior to obtaining the loan. You can find a reverse mortgage counselor online or by phoning (800) 569-4287, or contacting HUD.

2. What are the differences between a reverse mortgage and a home equity loan?
With a second mortgage, or a home equity line of credit, borrowers must have adequate income to qualify for the loan, and they make monthly payments on the principal and interest. A reverse mortgage is different, because it pays you - there are no monthly principal and interest payments. With a reverse mortgage, you are required to pay real estate taxes, utilities, and hazard and flood insurance premiums.

3. How much money can I get from my home?
The amount you may borrower will depend on:

  • Age of the youngest borrower

  • Current interest rate

  • Lesser of appraised value or the reverse mortgage FHA mortgage limit of $625,500 or the sales price; and Initial Mortgage Insurance Premium - your choices are reverse mortgage Standard or reverse mortgage SAVER

You can borrow more with the reverse mortgage Standard option. In addition, the more valuable your home is, the older you are, and the lower the interest rate, the more you can borrow. If there is more than one borrower, the age of the youngest borrower is used to determine the amount you can borrow. For an estimate of reverse mortgage cash benefits, select the online calculator from the reverse mortgage Home Page. Many online reverse mortgage calculators can provide you with an estimate of the amount of funds you can borrow.

4. How do I receive my payments?
You can select from five payment plans:

  • Tenure- equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.

  • Term- equal monthly payments for a fixed period of months selected.

  • Line of Credit- unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.

  • Modified Tenure- combination of line of credit and scheduled monthly payments for as long as you remain in the home.

  • Modified Term- combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.


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