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How Do Reverse Mortgages Work

    A reverse mortgage is a loan type that allows homeowners 62 years old or older, usually those already paying down a mortgage, to borrow part of the equity in the house as tax-free income. A home equity conversion mortgage allows homeowners to convert equity that has accrued in their home to cash. A reverse mortgage is paid off when the borrower dies, lives out of their house for over 12 months, sells the property, or stops paying taxes and homeowners insurance.

    The loan becomes payable when you die, fail to pay taxes or homeowners insurance on your house, leave your home in poor condition, or sell your house or stop using your home as a primary residence. Interest accrues each month on the reverse mortgage, and you still must have enough income to keep paying property taxes, homeowners insurance, and maintaining the home. If you fail to pay property taxes, keep homeowners insurance, or keep the house in good repair, your lender may demand that you pay back your loan.

    Although you are not liable to make your monthly loan payments, since you are still the owner of the house, you are still liable for paying your property taxes, keeping homeowners insurance, and making required repairs. If you owe $150,000 on your loan and you sell the house for $200,000, you pay the loan off first, and keep the remaining $50,000. Depending on how much you owe, you keep whatever proceeds from the remaining sale once you have paid the loan back.

    If you have a current mortgage balance that needs to be paid down, the value of the loan usually has some space left to allow the lender to make up for money that it spent on your behalf when it sold the loan. As the lender makes payments on you, the amount of the loan you owe increases, while equity declines. As you take money out, and interest is credited on the loan, the balance grows, and your ownership Equity position becomes smaller.

    Generally, the older you are, the more equity you have in the house, and the less you owe on the house, the more you will get. The older you are, the more money you can get, since the amount of your loan is mostly based on how long you are expected to live and the current interest rates.

    Often, the total amount you can borrow is smaller than what you would receive on a variable-rate loan. The amount you can borrow on a reverse mortgage depends on what kind of reverse mortgage you choose, how old the youngest borrower is, the current interest rates, and how much your house is worth.

    If the home declines in value, a homeowner or the homeowners estate is not required to repay the difference if the reverse mortgage loan is more than the value of the home. Federal regulations require lenders to structure transactions such that the amount of the loan does not exceed the value of the home, and borrowers or borrowers estates are not responsible for paying the difference if the total amount of the loan actually becomes larger than the home value. For example, if you fail to make payments on your property taxes or homeowners insurance, assume that you have no depository accounts (see below), do not maintain your house in a reasonable condition, or violate any of the other mortgage requirements, a lender may foreclose.

    At this point, borrowers (or their heirs) may repay most reverse mortgage loans and keep their homes, or they may sell the house and use the proceeds to pay off the loan, with the seller keeping whatever proceeds are left over when the loan is paid off. Lenders must also give each heir a few months to decide if they wish to pay back a reverse mortgage loan or let the lender sell your home in order to repay the loan.

    In some cases, the heirs can decide to repay the mortgage so that they get to keep the house. If another spouse wants to keep the house, then the mortgage will need to be paid back by other means, perhaps by a costly refinance. When the loan is paid off, any remaining equity is passed down to the heirs, or as your will or trust directs. The loan and interest are paid off only if you sell the house, permanently move out, or pass away.

    Both are loans that are paid off of your house, which you have to pay the lender. A portion of the equity in your house has to go toward paying loan costs, including the mortgage payment and interest. Instead of making your monthly mortgage payments, however, you receive a cash advance against some portion of your home equity. When you have a conventional mortgage, you are paying a lender each month for a period of time that you use to purchase the house.

    With a conventional mortgage, you are given money up front to purchase a house, and must start paying back that borrowed money immediately each month over a period of years. With a traditional mortgage, an individual takes out a loan to purchase a house, then pays back the lender over time. In a reverse mortgage, a person already owns a home, they take out a loan against it, getting a loan back from a lender who may not necessarily ever pay back. The homeowner may borrow from a lender against the value of the house, and get that money either as a line of credit or in the form of a monthly payment.

    If there is any balance remaining on a home equity loan or a home equity line of credit (HELOC), for instance, or tax liens or judgements, these would need to be paid with reverse mortgage proceeds first. When using the governments backed reverse mortgage program, homeowners are prohibited from borrowing more than the assessed value of their home, or the FHAs maximum loan amount ($765,600). The loan allows a lump sum to be taken up front, which is paid off with a series of payments. The loan does not need to be paid off while you live in the house.

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