How Does a Reverse Mortgage Work?

One of the most common mortgage questions must be, how does a reverse mortgage work?  The principle may seem too good to be true, with a payment flow that is “reversed”.  Once the basics are understood, however, it is easy to see why many senior citizens are interested in this type of income.

Many seniors find themselves in a situation where they live within their biggest asset.  Often dependent on Social Security benefits, they are house rich but money poor.  A reverse mortgage, available to those aged 62 and over, can remedy the situation. A tool for obtaining much needed cash, a reverse mortgage can liquidate the equity that has built in the house to become a fluid cash flow for the homeowner. 

A Home Equity Conversion Mortgage, insured by HUD, is the most common of these loans.  To be eligible, a homeowner must be at least 62 years old and have adequate equity in their home.  The amount of money they can access will depend on their age, the value of the home and the type of mortgage rate they choose, which can be fixed, adjusted monthly or adjusted yearly.  The homeowner keeps title to the home, and remains living there for as long as they wish. 

There are fees due at signing that are higher than those of a traditional mortgage.  Mortgage insurance, origination fees and closing costs are typical, and can be hefty.  They are written into the loan, and paid from the homeowner’s proceeds.  The homeowner can opt to receive the remaining proceeds through monthly payments, a lump sum settlement or a line of credit.  Over 60% of people accept the line of credit form of payment, which accrues in a cash account available to be transferred into the homeowner’s checking or savings account as needed.

 As part of the assurance that a homeowner’s question of “how does a reverse mortgage work?” it is mandatory for the homeowner to receive mortgage counseling by a HUD approved and HECM certified counselor.  There is usually a charge for the session, in which the counselor provides valuable information with the homeowner regarding the pros and cons of the mortgage and makes sure that the homeowner is mentally able to make the decision. 

Repayment of the reverse mortgage will be due when the homeowner dies or discontinues using the property as their primary residence. 

How does a reverse mortgage work?  Generally speaking, to the benefit of the senior homeowner.