What is a reverse mortgage? A financial tool offering access to home equity, explore how reverse mortgages help provide stability when borrowers need it most.
More and more Americans are buying homes these days, meaning that mortgages are increasing in demand. But if you're a senior citizen who could do with some extra cash, a reverse mortgage might be more up your alley.
But what is a reverse mortgage? How do they work and what are their benefits?
That's what we're here to look at today. Read on to find out more about reverse mortgages and their functions.
What Is a Reverse Mortgage?
So what is a reverse mortgage anyway?
It's a loan for those aged 62 years or older who want to borrow against their current home equity. They can do so without having to make any monthly payments.
It's primarily aimed at people who want more cash to spend during retirement or those who need funds for living expenses. Many consider it a good way to diversify income after retirement.
How Does a Reverse Mortgage Loan Work?
With a traditional mortgage loan, lenders pay a certain amount that goes to both the principal amount for the home as well as for interest. That means they pay each month to pay off both the home and the interest.
A reverse mortgage loan works in the opposite way. Instead of paying each month, you don't pay anything. The loan isn't free, but it gives you a lot more financial leeway each month.
Interest is still accrued onto the overall amount. When you move out or when the owner of the home passes away, the loan will eventually have to be repaid.
Benefits of Reverse Mortgages
The low-hanging fruit of reverse mortgages is that it helps senior citizens balance their checkbooks easier. With retirement usually comes a reduction in monthly income, making mortgage payments much harder.
Reverse mortgages let you pay your bills and other expenses without any looming mortgage payments hanging over your head. That leads to greater financial flexibility down the line.
A reverse mortgage is also often considered a "non-recourse" financing option. In some situations, if the overall balance increases, it'll never exceed your property's original value.
This gives your heirs a certain amount of flexibility with the property. If the owner passes away, they can sell the home to repay any debts and keep the equity. They can also give the title back to the lender if the debt is too high.
Reverse Mortgage Requirements
Not just anybody can get a reverse mortgage. You have to be 62 years or older. You also need to own your property outright or you need to have paid a large amount of the initial mortgage.
The property in question needs to be your primary residence, and the borrower can't be delinquent on any federal debts. The borrower needs to prove the financial capability to keep paying other taxes as well.
Understanding Reverse Mortgages
If you're asking yourself "what is a reverse mortgage," just know that it's a great way to free up income once you retire. Use this guide to help you understand why it's beneficial for those 62 years and older.
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