What Is a Reverse Mortgage And How Does It Work?
A reverse mortgage has been in use since the 1970s, but many people are still not aware of how it works and what benefits they can reap from it. Read on for more information.

A reverse mortgage is simply a type of loan for seniors, generally those who are 62 years old or older, that enables the senior homeowner to convert their house equity into money without having to pay monthly installments. You can convert your home equity to a lump sum if you sell your home, retire, or pass away. If you die, pass away or move out, however, it must be paid back within a set period of time, either immediately or by you, each of you or your heirs.

When most senior homeowners decide to sell their houses, most take out mortgages to finance the purchase price of the house and the down payment needed to buy it back. The idea is that once the senior homeowner has bought the home and paid off the mortgage, the value of their house will increase over time, enabling them to sell it again at a profit when they retire. If the home is paid off early, they can pay off the mortgage with the money from the sale of their house.

There are two types of reverse mortgages: fixed and adjustable. A fixed reverse mortgage will allow you to borrow the same amount of money over a set period of time, regardless of the interest rates, property values and other financial conditions prevailing at the time of your initial loan. Your monthly payments will be based on the amount of money you borrowed plus the interest rate, and any applicable fees or charges.

An adjustable reverse mortgage allows you to borrow an unlimited amount of money on a pre-determined basis depending on market fluctuations, both up and down. You can borrow more or less than the current value of your home. You can make adjustments to your monthly payment if the market rises or falls.

Fixed reverse mortgages require a lower initial loan amount to pay off the mortgage in the first place, while adjustable loans are more flexible. {because there is no fixed minimum amount required to qualify. These loans also come with higher interest rates.

Although a reverse mortgage gives seniors the ability to borrow money, the amount they can borrow will differ according to each senior’s circumstances. Your income and your financial situation are the factors used to determine how much you can borrow. For example, you may have a much higher income than an elderly relative that is in poor health, which would allow you to borrow more than someone with a lower income.

There are several benefits of having a reverse mortgage, including the ability to convert your home equity to cash quickly, to avoid paying taxes on the amount you save, as well as to be able to live independently. With these options, you do not have to worry about repossession of your house or the potential tax implications. However, before deciding on this type of loan, it is important to find out if you qualify for one.

Many senior homeowners get a reverse mortgage to build cash, which they can use for the most basic of needs. In some cases, this includes paying off a mortgage or paying off student loans or credit card debt. There are other circumstances where a reverse mortgage can be used as well, including to finance home improvements or home remodeling.

Although it has become quite common, reverse mortgages are not a good idea for many senior homeowners. One of the primary reasons is the high risk involved with the loan, which means the borrower will be paying much higher interest rates than with an unsecured loan. Another disadvantage is that you could be required to give up your home to pay off the loan.

If you are thinking about getting a reverse mortgage, take the time to consider the pros and cons and if they make sense for your situation. You should be able to understand the advantages and disadvantages of both types.


  • Gio Watts

    Gio Watts brings over 10 years of digital marketing experience to his role as marketing manager at Walletminded. In his current position, Gio oversees brand marketing, campaign management, and audience growth initiatives. Prior to joining Walletminded, Gio held marketing roles at several ecommerce and SaaS startups, most recently serving as senior marketing manager at CloudTable Inc. There, he specialized in paid social advertising and content marketing. Gio holds a bachelor’s degree in business marketing from the University of Oregon. He is a certified content marketing specialist and frequently guest lectures at his alma mater. When he's not devising omni-channel marketing campaigns, you can find Gio coaching youth basketball and indulging his passion for live music.

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