What is a reverse mortgage?
A reverse mortgage is a loan that is available to homeowners over the age of 62 that will allow them to convert part of the equity in their home into tax free cash. As long as these homeowners comply with the terms of the loan, (paying property taxes, homeowner’s insurance, maintaining your home) they do not have to make any monthly mortgage payments. This type of loan was created to help retirees with limited income to use their accumulated wealth to cover monthly living expenses. However, there is no restriction for how a reverse mortgage is used and many people use a reverse mortgage loan to purchase a home, payoff an existing mortgage, or as a line of credit.
This loan is called a reverse mortgage because in contrast to a traditional mortgage, the lender makes monthly payments to the borrower. Borrowers are not required to pay back the loan until their home is sold or the property is vacated. Typically, Social Security and Medicare benefits will not be affected if you aquire a reverse mortgage because it’s considered a loan and not additional income.
There are two types of reverse mortgages available:
Borrowers receive a fixed rate for the entire course of their loan. This also requires that you receive all of the proceeds of the loan at the time of closing in a lump sum. This is normally used for paying off an existing home loan or other existing obligations.
Adjustable rate mortgages are more flexible and generally provide borrowers with lower interest rates. With this option, you can choose to receive monies as a lump sum, a line of credit, or as tenure payments paid to you on a monthly basis. One of the advantages of this option is that the borrower is only paying interest on monies being utilized and the remainder is left in an account that can be accessed for future needs.
A reverse mortgage is an important financial decision and it is a requirement that the borrowers be counseled by a third party (not the lender) to ensure their protection.
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