How Does Reverse Mortgage Work

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    A reverse mortgage is essentially a loan against the equity of your home. The difference between a reverse mortgage and a traditional mortgage or home equity loan is that you do not make monthly payments to the lender. This amount is not paid back until you or your spouse leave the home.

    To obtain a reverse mortgage you will need to meet certain qualifications. You and your spouse must be at least 62 years old and use the home as your primary residence. The home has to be paid off or nearly paid off so that you have a substantial amount of equity built up.

    If these requirements are met, you can apply for a reverse mortgage loan. You decide if you want your loan amount to be sent monthly, in one lump sum or set up on an as needed basis line of credit. There will also be a substantial interest rate and possibly other closing costs and bank fees that will be added to the amount of the loan.

    When the monthly payments or lump sum is sent to you, you are allowed to use the money any way you choose. It can be used for home repairs, vacations, doctor bills, or for just a better life style. The money, if set up for payments, will arrive every month for you to do as you wish.

    The loan does have a due date of payment, but that depends on how long you and your spouse continue to live in the home. When both of you become unable to occupy the home, due to illness or death, the loan will need to be paid back.

    This means that your heirs will have to decide how they wish to handle the loan repayment. The choices are either to sell the home and pay off the amount owed on the reverse mortgage, or to remortgage the home with a standard home loan. The bank where the reverse mortgage was obtained does not hold the title to the home, and will allow up to a year for any heirs to decide how they want to handle the owed balance.

    Obtaining a reverse mortgage may be the answer some people are looking for, but it should be discussed with the family as well as any heirs who will have decisions to make concerning the repayment of the loan, once the initial borrower is unable to reside in the home. The fees of a reverse mortgage can become a large expense, along with incurring interest.

    While the payments being made to you will not affect your social security or your medicare, neither are you allowed to claim the interest on your taxes. Keep in mind that you are also liable to keep the home owner taxes and insurance current on the property. If one spouse is placed in a nursing home or dies, the other spouse can still remain in the home. This reverse mortgage only becomes due and payable when both spouses have left the home.

    Read more: How Does a Reverse Mortgage Work? |

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