How Does a Reverse Mortgage Work

How Does a Reverse Mortgage Work

A reverse mortgage, like a traditional mortgage, is a loan made by a lender to a homeowner using the home as security or collateral.

With a traditional mortgage, the homeowner uses their income to pay down the debt over time. However, with a reverse mortgage the loan balance grows over time because the homeowner is not making monthly mortgage payments.

A reverse mortgage loan typically does not require repayment until the last homeowner has passed away or has moved out of the property. Consequently, life expectancy is a huge part of the calculation in regards to how much money the borrower will receive. In general, the older you are, the more equity you have in your home and the lower your mortgage loan balance; the more money you can expect from a reverse mortgage loan.

Example of How a Reverse Mortgage Works

John and Anne are a retired couple, aged 72 and 68, who want to stay in their home, but need to boost their monthly income to pay living expenses. They would like to take a belated honeymoon. They have heard about reverse mortgage loans, but didn’t know the details. They decide to contact a reverse mortgage advisor to discuss their current needs and future goals.

John and Anne meet with an FHA appraiser, who determines that their home’s value is $300,000. They currently owe $35,000 on their mortgage.  Below is an illustration of how John and Anne spend their loan proceeds.*

 A Reverse Mortgage may be a Bad Idea. They are marketed as a solution to seniors' money problems or a way to more fully enjoy retirement. But reverse mortgages can be hard to understand, and the fees and interest can use up a substantial portion of a homeowner's equity

A reverse mortgage is a loan for seniors age 62 and older. HECM reverse mortgage loans are insured by the Federal Housing Administration (FHA) and allow homeowners to convert their home equity into cash with no monthly mortgage payments.

The vast majority of reverse mortgages are loans that are insured by the Federal Housing Administration. The formal name for these FHA- insured loans is Home Equity Conversion Mortgage (HECM). ... All reverse mortgage payments you receive are tax-free

To be eligible for a FHA HECM, the FHA requires that you 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, have the financial resources to pay ongoing property charges including taxes and insurance, and .

Most reverse mortgages are insured by the Federal Housing Administration under a program known as the Home Equity Conversion Mortgage, or HECM. Until recently,Bank of America and Wells Fargo dominated the reverse mortgagemarket.

Often, the total amount you can borrow is less than you could get with a variable rate loan. Interest is not tax deductible each year. Interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.You have to pay other costs related to your home.

Most reverse mortgage loans come with a period called “the right of rescission,” similar to a “cooling off period.” ... The lender must then cancel all loan documents and return all fees, closing costs, and unused funds paid by the consumer within 20 days. It is not common for borrowers to use their right of rescission.