How Does A Reverse Mortgage Work?
A Reverse Mortgage works differently than a regular mortgage. With a regular mortgage the borrower(s) are required to make monthly mortgage payments to the lender. With a Reverse Mortgage, the lender pays YOU (only on the traditional Reverse Morgtage). The loan is based on the age of the youngest borrower, the value of the home (determined by an appraisal), the mortgage balance owed, if anything, and the prevailing interest rate. Once it is determined how much the borrower(s) may qualify for, you then choose whether the money is paid out as a single lump sum, a regular monthly payment, a line of credit (similar to a home equity loan), or any combination of these methods.
As the owner or owners of your home, you retain title for the life of the loan. Your home simply acts as security for the loan as with any other mortgage. Interest accrues on only the proceeds you receive or draw. The available interest rates are fixed or variable and as your HECM Retirement Specialist, I can provide you guidance as to which option may be best suited for your needs.
As the loan matures, the mortgage balance increases while the home equity decreases. When the borrower(s) decide to move, sell the home or the last surviving borrower passes away, you or your heirs have options. If there is equity remaining, it is always in your best interest to sell the home, pay out any lender fees and loan balance and receive the remaining equity.
If at the time of sale the balance of the loan EXCEEDS what the value at the time of sale (you “outlive” the loan), the lender will sell the home for you or your heirs. Because the loan is insured by FHA, you nor your heirs will ever owe more than the value of the home. This is known as “non-recourse”.