How Does a Reverse Mortgage Work?

Hey there, bloggy friends. In the interest of learning new things, I have a guest post today. Sexy Nerd and I have purchased homes, but still never knew what a reverse mortgage is and how it works. Is it like selling your home but still getting to live there? 

Years ago, we had an elderly neighbor who refinanced her home with a reverse mortgage and we've always been curious about the details. Here's the answer:

How Does a Reverse Mortgage Work?

When retiring, lower income than what you are accustomed to can be a cause of stress. Just because you are retiring does not mean you need to compromise on the lifestyle that you have come to know.

Although it is tempting to resort to drastic measures, such a remortgaging your house, or taking out a loan, both options come with major debt implications, and the monthly repayment expectations can be crippling.

A reverse mortgage, however, is an excellent solution for those who are aged 62 and above, and can be a huge help in assisting with everyday expenses and bringing all-around financial relief in retirement. 

No Risk of Eviction

A skipped payment bears massive consequences if you are bound to a traditional loan or mortgage. However, a reverse mortgage only holds you accountable for the full amount at the end of your stay in the house that relates to the loan. As long as you live in the house, you cannot be evicted, as your permanent occupation is a prerequisite of the loan. 

Flexible Duration

Circumstances such an unexpected hospital stay could affect your ability to permanently reside in the house. Luckily, it is generally possible to dictate the duration of the loan period, simply by living at the address for as long as you need the loan to be active. 

Access Your Equity While Living in Your Home

Many people opt to sell their house upon retirement. Then where do you live? The reason a reverse mortgage is such a popular retirement option is that it is not only possible, but compulsory to live in your house for as long as you want the loan to remain valid.

A reverse mortgage calculator is a quick method used by reverse loans lenders to calculate the value of the loan that you would be eligible for. Because the amount you can borrow is limited by federal law, it is crucial to ensure that you remain compliant with lending regulations, to protect both you and the lender. 

Government-Backed VS Private Route

Although the difference is minimal, it is important that you know the difference between a reverse mortgage and a home equity conversion mortgage, or HECM.

An HECM is insured and backed by the government. It can only be attained by approaching a governmental institution, such as the Department of Housing and Urban Development.

A reverse mortgage from a private lender such as a bank is not government-insured, but is bound by the same rules and laws that apply to an HECM, relating to how much can be borrowed. You can set up and tailor-make your receiving option so that you receive your money in a lump sum, as a line of credit, which gives you access to your money as you need it, or as repeat monthly payments to finance monthly expenses, depending on which option best suits your needs.