What's a reverse mortgage loan?
A reverse mortgage is a specialized financial product designed especially for seniors who have either paid off their first mortgage in full or have built up a large amount of home equity. If you qualify for a reverse mortgage loan, you'll be able to access your home equity with little risk.
Your home equity payment can be released either as a lump sum or in scheduled payments. A reverse annuity mortgage is one that makes payouts on an annual basis.
How a Reverse Mortgage Works
To understand how a reverse mortgage works, it's useful to compare the process to the structure of a standard fixed or variable rate mortgage.
When you take out a standard mortgage, you make a down payment on a house and finance the remainder of the sale price through a mortgage lender. You build up equity in the house by making monthly payments, thus amortizing your mortgage over the term of the loan.
Reverse mortgage lenders do not collect monthly payments. Instead, they put a lien on your property and add all the interest that accrues on your reverse mortgage to the lien. You are free of any obligation to pay down this interest until you sell or move out of the house, or until you pass away. For this reason, a reverse mortgage is sometimes also called a "lifetime mortgage."
When you take out a reverse mortgage, you do not relinquish any ownership claims to your home. You simply access your home equity without having to pay it back until your home is sold. If you have an outstanding balance on your first home mortgage, the money you're paid out by the reverse mortgage must be applied to this balance. Otherwise, you're free to spend or invest it as you wish.
Do You Qualify for a Reverse Mortgage?
In the United States, law requires you to be at least 62 years of age to qualify for a reverse mortgage loan. While most reverse mortgage lenders do not require you to have a regular income or a good credit score, these factors can affect the terms of your loan and the amount of home equity the lender will finance the release of.
In 2009, the lending limit for a reverse loan was increased to $625,000, and origination fees for reverse mortgage lenders were capped at $6,000. These limits are in place regardless of the appraised value of your home.
A reverse mortgage calculator can help you determine how much of your home equity you'll be able to access if you opt to pursue this course of action. You simply need to enter the reverse mortgage information (including the value of your home, the amount of home equity you have and the interest rate of the loan) into the calculator to find out how much money you qualify to receive.