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How Does a Reverse Mortgage Work?


A reverse mortgage is a mortgage in which homeowners receive payments against the equity in their homes. It is different from a conventional mortgage, because in this kind of mortgage homeowners make payments toward a loan they used to purchase the home.

Requirements for a Reverse Mortgage

In order to qualify for a reverse mortgage, applicants must be senior citizens. The homes on which they have the reverse mortgage must be their primary residence. They must also not carry a large amount of debt on their homes. They either will have to own the home or must only owe a little on their mortgage loan. Unlike traditional mortgages, income is not needed in order to be approved for a reverse mortgage. Reverse mortgages are often used as an additional income source in order to supplement Social Security payments. Senior citizens may use this additional income to pay for long-term insurance for their health care, or to pay for in-home health care or home repairs.

How Reverse Mortgages are Structured

Senior citizens that apply and are approved for reverse mortgages may choose to receive the payments in one lump sum or as periodic payments. The money they receive as part of a reverse mortgage is tax-free. The amount of money that people in reverse mortgages can receive is determined by the Federal Housing Authority, and is based on the value of the home.

Paying Back the Reverse Mortgage

The payments that people who are approved for a reverse mortgage receive are considered part of the mortgage loan. However, the reverse mortgage part of the loan does not need to be paid back until the affected borrower living in the home moves out of the home or passes away. At this point, the mortgage company will expect payments will be remitted toward the loan. The total cost of the loan will include the reverse mortgage payments made to the borrower from the lender. Typically, if the loan becomes due because the borrower passes away, the home cannot be inherited by the borrower’s family members. In this instance, the home will be sold in order to pay off the loan.

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