How Does a Reverse Mortgage Work

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Many older Americans are struggling trying to come up with enough money to live a comfortable lifestyle during retirement. While the financial markets have been unpredictable and have impacted the retirement portfolios of many people, there are some solutions available that may be able to help. 

The reverse mortgage is one tool that many seniors should consider using when creating a supplemental income is important. 

What Is A Reverse Mortgage? 

This is a special type of home loan that allows the owner of the home to borrow against the equity that has been accumulated in the house. These loans are only available to individuals over the age of 62. 

With this type of loan, the homeowner can elect to receive payments from the lender on a regular basis. These payments can continue for several years until the equity in the home has been paid for by the lender. The nice thing about these loans is that they do not have to be repaid by the homeowner during their lifetime.

 Even if the equity in the home has been exhausted, the lender does not have to be repaid as long as the homeowner is still living in the house. The loan can eventually be repaid when the house is sold or out of money from the homeowner’s estate when he passes away. 

Approval 

Getting approved for this type of mortgage is a little bit different than getting approved for a traditional home loan. The homeowner must be at least 62 and the house has to be paid off or have very little debt against it. 

When getting approved for this type of loan, the homeowner does not need good credit or any income. Since the loan will not be repaid by the homeowner, these aspects are not important. Instead, the lender will need to verify that the house is worth the amount of money being borrowed. 

Before a homeowner can participate in this type of program, he must go to a counseling session with an approved mortgage counselor. During this session, the counselor will make sure that the homeowner understands how the program works and make sure that the reverse mortgage is in his best interest. 

Payment Options 

When getting a mortgage, the homeowner can typically choose between a few different methods of receiving payment. Some reverse mortgages provide a monthly payment over an extended period of time for the homeowner. 

Other mortgages provide access to a line of credit that the homeowner can tap into at his discretion. Other reverse mortgages provide a combination of a line of credit and monthly payments for the homeowner. The homeowner can look at the options and see which one provides the income or cash that he needs based on his situation. 

Paying Back the Loan 

While the homeowner is still alive and living in the house as his primary residence, the mortgage does not have to be repaid. When the homeowner decides to sell the house or move into another home, the loan will then have to be paid back. 

If the homeowner dies, the loan also must be repaid at that time. When the homeowner passes away, it will be up to the executor of the estate to make sure that the debt is paid back. 

This could be done with proceeds from a life insurance policy or from the value of other assets that the estate holds. In some cases, the executor of the estate has to sell the home in order to generate enough money to pay it back. 

Reverse mortgages are a type of loan that can be used to supplement Social Security and other retirement income. Used correctly, they can significantly improve the lifestyle of many retirees.

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