A new term, reverse mortgage, is simply a loan against your home that you do not have to pay back for as long as you live there. That means that with a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The best thing is that the cash you get from a reverse mortgage can be paid to you in several ways. You can get it all at once, in a single lump sum of cash, as a regular monthly cash advance or as a credit line account that lets you decide when and how much of your available cash is paid to you. You can also have a combination of these payment methods.
It does not matter how this loan is paid out to you, you typically don´t have to pay anything back until you die, sell your home or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older. For once it is good to be old!
To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. The difference with a reverse mortgage is that you don´t have to make monthly repayments. So there is no need for a minimum amount of income to qualify for a reverse mortgage. You can have no income and still be able to get a reverse mortgage.
With ordinary home loans you can lose your home if you don´t make your monthly payments on time. With a reverse mortgage there are no monthly repayments to make so you can´t lose your home by not making them. The usual reverse mortgages require no repayment for as long as you or any co-owner live in the home.
The difference from other home loans are important in theses ways. You don´t need an income to qualify for a reverse mortgage and you don´t have to make monthly repayments on a reverse mortgage.
You can easily see how a reverse mortgage works by comparing it to a forward mortgage which is the kind you use to buy a home. Both types of mortgages create debt against your home and both affect how much equity or ownership value you have in your home. They do so in opposite ways.
When you purchased your home, you probably made a small down payment and borrowed the rest of the money you needed to buy it. Then you paid back your traditional forward mortgage loan every month over many years. In that way your debt decreased and your home equity increased. One can say that your forward mortgage gave the result of falling debt and rising equity.
The purpose of reverse mortgages are different than forward mortgages. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. With a reverse mortgage you are taking the equity out in cash.
A reverse mortgage increases your debt and your home equity decreases. It is just the opposite, or reverse, of a forward mortgage as the lender sends you cash and you make no repayments. The amount you owe gets larger as you get more and more cash and more interest is added to your loan balance. As your debt grows, your equity shrinks, unless your home´s value is growing faster than the interest rate.
In short on can say that a reverse mortgage is a “rising debt, falling equity" type of deal. But that is exactly what informed reverse mortgage borrowers want. They want to spend some of the value in their home while they live in their homes.
Keith George always writes about valuable news & reviews. A related resource is Reverse Mortgage
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