How Does A Reverse Mortgage Work? We've all heard about reverse mortgages. The bank will loan you money, you never have to make a mortgage payment and you still own your home. But still..... How do they work? This video will help to explain it to you.
Let's get started - First the lender must determine the loan amount. They will use a formula set out by FHA that takes into account the value of the home, the age of the borrowers and the current interest rates to determine the loan amount.
Once they know what you qualify for, then they will want to know how you would like recieve your loan funds. The closing costs of the loan will be rolled into the loan itself. This means you will have a starting balance equal to those costs plus any other funds you decide to take at closing.
Perhaps you have your home paid off and do not need to have all of the loan money right now. You could choose to take the loan proceeds in the form of TENURE, (a monthly payment for as long as you live in the home.) In this scenario, on the first of every month you would recieve tax free funds from the lender. Each month you would also recieve a mortgage statement showing you the prior month’s loan balance, the amount of the payment to you, the amount of interest and insurance charged and the new loan balance.
Or perhaps you would like to have all the loan funds ready and available as you need them, in a line of credit. In this scenario, you would receive a statement each month from the lender showing the existing loan balance, and the amount of funds previously available in a line of credit. The statement would also show any withdrawals you made from the line of credit the prior month and the new available line of credit.
One of the coolest features of this particular scenario is that the line of credit on a reverse mortgage grows over time. The amount available to you in a line of credit grows at a rate equal to the rate charged on the loan itself, plus 1.25%. So, a reverse mortgage line of credit in the amount of $100,000 today could be $104,000 plus next year. That is a great incentive to limit your withdrawals for emergencies building up the line of credit over time so that when you are 70,80, or 90 and really need the funds for home health care or other emegencies, you have more to draw from.
Another scenario would be to take all the money right now. Maybe to make a major purchase, like a second residence or investment property.
The last (and most popular) scenario is to combine the different payout options. Perhaps taking some funds at closing to payoff other debts and leaving the rest of the proceeds in the growing line of credit. It’s your choice. I have had clients who choose some cash, some line of credit and a tenure payment as well. It’s up to you.
If you currently have a traditional or forward mortgage, you can use the reverse mortgage to pay it off. In fact it is required by the lenders that any existing mortgages on the property must be paid off with the reverse loan proceeds..
You know the bank is going to make money on the Reverse Mortgage, right? They’re a bank, that’s what they do. I mean really!... they’re in those big tall buildings downtown and they are happy to make money off the millions of us living in our little home sweet homes.
Basically, the banks and investors are just very patient. They wait. They wait until you die, sell, or permanently leave the home due to medical reasons. Then all the funds that have been borrowed, plus all the accrued interest and insurance is due and payable. Usually the heirs will sell the home, payoff of the reverse and keep the change. But, if the home does not have enough value to payoff the balance, then what? This part is pretty cool….The reverse mortgage is a non-recourse loan. This means if the proceeds from the sale of the home are not sufficient to payoff the mortgage the bank has “NO RECOURSE” to the borrower (or their heirs) for the shortfall. So, the worst that can happen is that your kids get nothing from the home when you pass away.
Well that took a little longer than I thought, so thanks for sticking with me.I hope you found it to be helpful. I’d appreciate you leaving a comment and any other questions you might have in the comments section below. I’ll be answering more questions in the following weeks so don’t forget to I hope you will also Subcribe to my YouTube Channel and be notified when a new video is released.
If you want to know specifically what you or your parents might qualify for on a reverse mortgage, please click on the link below to provide me with the basic information needed for an analysis. You’ll have your numbers in no time at all!
By Deborah Nance
Your Local Southern California Reverse Mortgage Professional
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iReverse Home Loans, LLC, NMLS#810502 originates reverse mortgages in Alabama, Alaska, Arizona (MB-0919584), California, Colorado, Connecticut, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon (ML-5378), Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont (1164-MB), Virginia, Washington and Wisconsin.
Important Information: Reverse Mortgages are neither "endorsed" nor "approved" by the Federal Government. The FHA (Federal Housing Administration) provides certain insurance benefits for lenders and borrowers in connection with the lender’s HECM loans; the FHA does not make or originate loans. The owner(s) retain title to the property that is the subject of the reverse mortgage until the person sells or transfers the property and is therefore responsible for paying property taxes, insurance, maintenance and related taxes. Failing to pay these amounts or failure to maintain the condition of your property may cause the reverse mortgage loan to become due immediately. A reverse mortgage is a complex loan secured by your home. Whether such mortgage makes sense for you depends on your financial situation and needs. For these reasons, we strongly recommend that you consult with a qualified independent housing counselor, family members and other trusted advisers before making this decision. This website is not from HUD or FHA and was not approved by HUD or any government agency.