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For some people at or near retirement, reverse mortgages are a great way to generate a monthly income. But many people do not know or do not understand exactly what a reverse mortgage is and how it works.
The Basics of Reverse Mortgages
For some people at or near retirement, reverse mortgages are a great way to generate a monthly income. But many people do not know or don’t understand exactly what a reverse mortgage is and how it works.
There are different types of reverse mortgages. While they differ slightly, they all share a set of common features.
How does a reverse mortgage work?
A reverse mortgage is like a regular mortgage except the bank pays you the monthly payment. A reverse mortgage is available to seniors who are:
- over 62 years of age
- own the house free and clear
- occupy the home as their principle residence
They pay you for the equity that you have built up in the house. The homeowner can keep receiving this money up until he or she dies, sells the home or uses all available equity. The lender then expects the full loan amount back in one lump sum. This is usually accomplished by selling the home.
Reverse mortgage can give many older people the added income they need to buy their necessities or buy whatever they want or need. Unless they plan to give the house to someone, a reverse mortgage can make sense.
To give you a better understanding of reverse mortgages, here is a list of some of the features that are common to all reverse mortgages:
There are various fees that must be paid when getting a reverse mortgage. Think of them as “closing costs”. These fees are usually rolled into the loan and are due, along with interest, when the loan is finished.
Limited Loan Amounts
You are not able to get the full value of your home on a reverse mortgage. Each reverse mortgage is different on the amount of money a person can receive. And some reverse mortgages cost more than others. The mount of money you can receive depends on a combination of your age and the value of your home. Basically the older you are the more money you can get. Also, the more your home is worth the more money you can get.
Unlike regular mortgages, you can for any reason choose to cancel the loan. But you must do it within three days of closing the loan. These three days are three business days, which do not include holidays. The cancellation, however, must be done in writing and sent by mail or fax. It cannot be done in person or over the telephone.
The loan must be repaid when the last surviving borrower dies, sells the home or moves out. But there are other situations in which a lender can ask for full repayment before then. Those situations are:
- Failure to pay your property tax
- failure to keep up your home
- failure to insure your home
If any of these things happen, the lender can ask for full repayment early. As with regular mortgages, you can be considered in default if:
- You declare bankruptcy
- You donate or abandon your home
- You commit fraud or misrepresent yourself
- Your property is condemned