Reverse Mortgage 101: The Basics of this “Senior” Loan

It might not seem like it, but senior citizens actually make up a full 10% of homebuyers in the country. That’s because the government makes it easier for seniors to borrow cash. Senior citizens are privy to a special type of loan called a reverse mortgage, a type of loan that allows seniors to borrow money equal to the value of their home, with the lender paying them rather than the other way around.

To get a better sense of what a reverse mortgage is, let’s break down some common questions about this “senior” loan:

Reverse Mortgage: What is it Exactly?

To make a long story short, a reverse mortgage is a type of loan available only to homeowners aged 62 and above. It’s usually only available to seniors with considerable home equity (as this shall be used to borrow against the value of their current home), although some states might have different rules.

Reverse Mortgage: How Does it Work?

Usually, when a senior homeowner applies for a reverse mortgage, they receive their funds in six different ways (which we’ll discuss later). Unlike a regular mortgage (also known as a forward mortgage), the homeowner doesn’t make loan payments; rather, it’s the lender who pays the homeowner the funds in the payment option they’ve chosen.

When the homeowner sells the home, moves away permanently, or most commonly, when they pass away, the entire loan balance becomes due and payable. To protect borrowers, federal laws regulate the maximum loan amounts available and also limits the liability of the borrower’s estate should the loan balance be larger than the home’s value (which happens when the real estate market dips).

How Do You Receive a Reverse Mortgage?

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There are six ways that you can receive your funds when you qualify for a reverse mortgage:

  • Lump Sum
  • Equal Monthly Payments
  • Line of Credit
  • Equal Monthly Payments + Line of Credit
  • Term Payments
  • Term Payments + Line of Credit

The first way to receive it is via lump sum. A lump sum means exactly what you think it does: you receive the proceeds all at once when the loan pushes through. Of the six ways you can receive a reverse mortgage, the lump sum option is the only one with a fixed interest rate (the others have adjustable rates).

Meanwhile, equal monthly payments refer to a payment plan wherein the borrower receives the funds monthly, so long as the borrower lives in the home as their primary residence. Term payments also fall within this category, although term payments usually have a set amount of time for the monthly payments to be made.

A line of credit, meanwhile, refers to a reverse mortgage payment wherein the borrower can avail of cash loans from the lender, so long as the loan is covered by their collateral.

An equal monthly or term payments with lines of credit mean that the borrower receives a steady payment from the lender every month, and should they need more, they have a line of credit from which they can borrow from.

There are, of course, other loan options available for senior citizens and retirees, but you might want to opt for a reverse mortgage loan in the event of emergencies.

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