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August 2, 2022
If you are struggling to figure out how does a reverse mortgage work, you are not alone. One thing is clear: reverse mortgages are NOT clear. A recent NewRetirement poll indicated that 46% of respondents had the facts wrong about reverse mortgages.
This article focuses on explaining the basics of how does a reverse mortgages work. If you are looking for more detailed information about reverse mortgages, try: Who Qualifies for a Reverse Mortgage, Is a Reverse Mortgage Right for You or A Complete Guide to Reverse Mortgage Rates and Fees.
Home Equity: Home equity is the amount you could sell your home for today minus the amount you still owe to the bank for your mortgage, second mortgage or any other liens (loans) on your home.
So, if your home could sell for $250,000 today and you owe the bank $50,000, then you have $200,000 in home equity.
Your home equity can grow in two ways:
Mortgage: A home mortgage is a legal agreement that uses the home as collateral for a loan. Since most people do not have enough money in cash to buy a home outright, they borrow the money from a bank and pay interest on the money – these loans are called mortgages.
When you agree to a mortgage, you agree to a set of provisions about how much you will pay the bank monthly. Your monthly payments are usually set by a formula that takes into consideration:
Home Equity Line of Credit: If you have built up home equity in your home, you can sometimes work with the bank to establish a line of credit – money that is available for you to withdraw and use. You do not pay interest on the money available to you – only on the funds that you withdraw.
When you buy a home with a traditional mortgage, you own, get to live in and use your home while:
When you get a reverse mortgage on your home, you also own, get to live in and use your home while:
So, if you do not currently have a traditional mortgage, your full loan amount can be accessed as either cash or a home equity line of credit.
If you already have a mortgage and secure a reverse mortgage, then part of your loan amount will be used to pay off your traditional mortgage. This will eliminate your monthly mortgage payments – which will probably greatly improve your monthly budget.
In summary, a reverse mortgage is a loan for people ages 62 and over that enables you to retain home ownership while using your home equity to help fund retirement.
Here is how other people explain how a reverse mortgage works:
And, below is how some actual Reverse Mortgage borrowers explain their Reverse Mortgage loan:
Have more questions? A reverse mortgage lender could answer these for you with no obligation on your part. Get in touch with a lender here.
Or, get an instant estimate of your Reverse Mortgage loan amount now. Seeing the numbers on your own home could help explain the product to you in more meaningful ways.
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