How A Reverse Mortgage Works
Although there are many mortgage options now being offered to potential homebuyers, one that has received a lot of attention is the reverse mortgage. The United States Department of Housing and Urban Development, also known as HUD, is currently being inundated with questions with a large number of people asking “what is reverse mortgage?”
In answer to “what is reverse mortgage”, this is actually a private type of loan but one that is insured by the federal government. What makes a reverse mortgage unique is that a portion of the equity in the home is converted to cash, which can then be used by the homeowner in whatever way they see fit. Because qualifications and restrictions are associated with a reverse mortgage, it is used by the elderly, many times as a means of financial security.
One of the main values when it comes to what is a reverse mortgage is that the homeowner’s income is not checked or even considered. This means the person could have very little or even no income and still qualify for a reverse mortgage loan. Of course, as with any mortgage, there are various dynamics that are looked at by the lender in making the final decision on approval.
In answer to what is a reverse mortgage and is it a good choice, there are other things that come into play. As far as how the money is distributed to the homeowner, there are three options to include taking a lump sum, getting a specified monthly check, having a line of credit, or the homeowner can mix and match the choices. Keep in mind that paying back on this type of mortgage does not take place unless the homeowner moves, sells the home, or should die.
As mentioned, the primary value of what is a reverse mortgage is that funds are taken out of the equity and then paid out to the homeowner in the way of a monthly payment, one lump sum, as a line of credit, or the homeowner can use any combination. Best of all, after the funds have been distributed, it is the homeowner’s discretion to spend it in any way seen fit. As far as paying the loan back, this does not occur until one of three things happens – the homeowner sells the home, moves, or passes away.
Advantages
The first good thing in response to what is a reverse mortgage and is it a good choice is to know that the funds coming from the home’s equity can be used in whatever way the homeowner prefers. This means the money could be used to take vacations, add on to or improve the home, send a child or grandchild off to college, pay off bills, have surgery, etc.
Another advantage of a reverse mortgage is that all the money being taken out against the equity is completely tax free and, there are zero restrictions on income. This means if the homeowner is bringing in only a small amount of money each month on which to live, or has no income at all, he or she would still qualify to use money from the equity.
Another area of value pertaining to what is a reverse mortgage is that instead of scrimping every month, barely getting by on money saved up, a pension, or perhaps Social Security or Disability, the money is a great supplemental income. Considering that any funds taken out of the equity for a reverse mortgage is not taxable, adding another benefit on top of the others.
As long as the homeowner owns and lives in the home, no money on the mortgage loan is paid back. However, as mentioned if the person moves, sells, or should pass away, then the reverse mortgage would then start to be repaid. In the case of having heirs, anyone thinking about this type of mortgage needs to have a full understanding of all the options and factors since there are a number of variations.
Negative Aspects
As you can see from the information provided above, there is tremendous value associated with what is a reverse mortgage. Unfortunately, there are also some downsides to this type of loan that should be reviewed. First, there are fees associated with any loan such as application fee, appraisal, insurance, closing, etc. However, in the case of a reverse mortgage, the fees are typically higher and in fact, there are some lenders that will also tack on a service fee of some kind.
Then, when looking at “what is reverse mortgage” and possible disadvantages, keep in mind that the home’s condition would also be a factor looked at by the lender. For the loan process to be finalized, the home would have to be deemed structurally sound and in good condition. However, if problems are identified, most often any needed repairs to bring the home to set standards would be added into the reverse mortgage loan.
As you can see, there is a lot of information that follows the question of “what is reverse mortgage”. Learning all you can puts you in a position of making the best decision for you.
Find additional information on reverse mortgages visit Jumbo Reverse Mortgage