How does a reverse mortgage work? As a senior citizen and a home owner, it is important for you to know the answer to this question and understand how a reverse mortgage can be beneficial for you.
What is a Reverse Mortgage?
A reverse mortgage is simply a loan that is available to seniors against equity in their home. A unique aspect of this loan is that you do not need to make any monthly payments to repay the loan throughout your lifetime. The loan repayment is deferred until the death of the borrower, except in some special circumstances. But this option is available only to seniors, and you need to be at least 60 years old to avail a reverse mortgage on your home.
How Much Money Will You Be Able to Avail?
There are several factors that determine how much money you will qualify for through reverse mortgage. Your age and the appraised value of your property are the most important of these factors. As you grow older, the amount that you qualify for increases. For example, a 70 year old will qualify for a higher loan percentage than a 60 year old. Similarly, as the value of the property goes up, the maximum loan amount also goes up. However, the loan amount can never exceed 40% of the value of your property, and there are also absolute upper and lower limits to this amount.
What Happens When the Value of the Home Appreciates or Depreciates?
One of the biggest
advantages of a reverse mortgage is that at any time you will only owe the lower of the two – the loan amount (with interest) and the value of your house. This means that there will never be a situation where you owe more than what your house is worth. On the other hand, if the value of your house rises, you will enjoy the full benefit of that capital appreciation.
How is the Loan Repaid?
As long as you are staying in your home, you do not have to make any repayments on the loan. If you move out of your house or plan to sell it, you would need to make the repayment in full, including interest and pre-payment penalty.
If the borrower does not sell or move out of the house, the loan repayment only needs to be made after his or her death. If a prior arrangement has been made, the heirs can choose to pay off the reverse mortgage. Otherwise, the house is sold off, and after settling the loan amount and accrued interest, the balance is paid to the heirs.
In summary, a reverse mortgage is a great option if you want to unlock the value of your home and want to use the cash without having to sell your house. Although you would now have a good enough idea of how does a reverse mortgage work, do not forget to study all the terms and conditions in detail before you enter into a reverse mortgage contract.