How Does a Reverse Mortgage Work?

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Reverse mortgages are a great way for retirees to supplement their income using the equity in their home. The simplest way to define a reverse mortgage is to think of it as the opposite of a traditional home loan. When a homeowner executes a reverse mortgage, the bank will pay them for the equity in their, and recapture it later when the home is sold. The homeowner can choose to take the money in one of three ways:  either by a lump sum, a line of credit, or monthly payments. Most often, the homeowner chooses to receive monthly payments from the bank. This increases their monthly income, and can close the gap on any deficiencies in their budget.

Other Benefits of the Reverse Mortgage

In addition to being able to supplement your income while in retirement with the equity in your primary residence, there are also some further key benefits to you:

  • You will never owe more than your home is worth.
    In the event that property values decline and your balance is greater than the appraised value of the home, mortgage insurance will cover the gap. This is a great feature to provide stability for the borrower and their heirs.
  • In additional value will be paid to your beneficiaries.
    That’s right, after you pass on, and your heirs sell the home, just like a regular mortgage, if the sales price exceeds the loan amount, then they will get the additional money.
  • The income from the reverse mortgage does not count as taxable income.
    So as you supplement your income with this type of loan, you don’t have to worry about paying any additional taxes on the gain.
  • Income from a reverse mortgage will not count against any Social Security or Medicare benefits.
    Sometimes if you get a job during retirement, and you income exceeds a certain amount, you can lose some or all of your all of your Social Security and Medicare benefits. Not true in the case of the reverse mortgage. The proceeds do not count against any quotas that these programs may have.

Some Downsides to a Reverse Mortgage

The reverse mortgage is a loan, and does acquire interest. So be sure to get a Truth in Lending statement from the mortgage company or bank you are working with to be sure of exactly what will be owed at the end of the reverse mortgage, what your interest rates are, etc. The rates on these loans should be good, considering you have good credit, etc.

Another issue with the reverse mortgage is that you must own the home free and clear of any other liens. If you have an existing mortgage, that mortgage will have to be paid off upon closing the reverse mortgage.

Last, I just don’t like having debt. I currently have a regular mortgage on my house and would like to not have the payment. With a reverse mortgage, you don’t have to pay the money back until death, however I just would like to be completely free and clear of debt, period.

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Reverse Mortgage HECM

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A Reverse Mortgage HECM, sometimes referred to as a Home Equity Conversion Mortgage (HECM), is a special type of home mortgage that lets a homeowner convert a portion of the equity in his or her home into money in their pocket. Simply put, a reverse mortgage is the exact opposite of a regular mortgage. The lender pays the borrower, and the borrower’s debt will increase as the equity in their home decreases. It allows individuals aged 62 and older to convert their home’s equity into tax free cash to help act as a second income during retirement. A reverse mortgage is a great way to tap into the equity of your home if you are not looking to sell your home and are also looking for tax free income. You may be asking yourself, just how does this work, and when will the loan need to be paid back?

Reverse Mortgage Loan Details

Reverse mortgage loans can be withdrawn in one (or more) of three options:

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