What Is A Reverse Mortgage, And How Is It Different From A Typical Mortgage?

Everything you need to know about this appealing retirement ‘paycheck’ If you are 62 years old or older and you own a home, you could be eligible for a reverse mortgage to help you tide over a financial difficulty. A reverse mortgage is a loan that lets you convert the value of your home into available cash while allowing you to continue to live in the house.  In the most basic sense, it is a loan against the value of your property. The most significant difference, as the name suggests, is that with a reverse mortgage, the financial institution or lender pays you. After assessing the value of your home, the lender decides an interest rate for the outstanding amount of the loan. This interest rate can either be a fixed rate for the duration of the credit or one that changes through the loan period. You, as the borrower, also have to pay specific fees associated with the loan along with insurance premiums.  Let’s look at how a borrower can decide how the amount is paid out. 

Lump-sum Payment

Many borrowers prefer to have the full amount paid out to them in a lump sum. This is beneficial if a large payment is due, and the borrower does not have the funds to cover it.

Line Of Credit

Here the borrower is given a limit to which funds up to the amount eligible can be withdrawn.

Term Payment

Under term payment, the borrower can decide on monthly payments for a pre-decided number of years.

Tenure Payment

In a tenure payment, the borrower receives monthly payments until the loan is completed. There is no stipulation on what you can spend this money on. The lenders provide a reverse mortgage based on the equity value of the home and not on the credit score or monthly income of the borrower – a blessing for seniors whose money is tied into their home. This is also great for those who are homeowners but have no other source of income. The interest accrued is payable when the loan is due. There are, however, specific conditions that have to be met so that the loan does not become due.  The borrower has to reside in the home against which the reverse mortgage is taken. If the borrower sells the home, changes residence, shifts to a nursing home or assisted living facility or passes away, the amount due along with interest has to be paid by the borrower or heirs. All insurance premiums should be up to date. If the borrower fails to maintain the home or fails to pay property taxes, it is considered a default and the lender can foreclose the loan and evict anyone residing on the property. Looking at the positives of having cash in hand without having to sell off the home can be great, though it is also essential to keep in mind the dark side of having a reverse mortgage. If a borrower wants to pass on his home to an heir, he must ensure that the loan amount is fully paid up along with interest to avoid foreclosure and repossession by the lender. The borrower must also reside in the home until the loan is settled failing which, the loan becomes due. The downside of having a massive payout of money in a lump sum is that most people tend to spend it before contingencies arrive. Defaulting on a reverse mortgage also leads to defaulting on the loan and borrowers losing their homes. A borrower should keep in mind that the many fees associated with reverse mortgage tend to add up and become expensive when it’s time to settle. While applying for a reverse mortgage could be a benefit to one who has a firm financial plan in mind, a borrower must be aware of all the pros and cons of such a transaction. Keep a keen eye out for reverse mortgage scams that target seniors who are not used to financial dealings.