Reverse Mortgages: What Are They & How Do They Work?

Posted on June 12, 2019, 12:53 pm
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The retirement process means you have to adapt to several changes in your lifestyle and routine. One of those changes is you may not have the same level of income you are used to. When you are suddenly on a fixed retirement income, it can be difficult to maintain the lifestyle you are used to. You may also encounter unexpected expenses that can be difficult to manage, such as medical bills or home repairs. A reverse mortgage can help, but what are reverse mortgages exactly and how do they work? Below are the answers to those and other reverse loan questions.

The Purpose Of A Reverse Mortgage Contract

You may be wondering why you should look into signing a reverse mortgage contract instead of a traditional home loan agreement. The purpose of a reverse mortgage contract is to provide you with more flexibility and comfort during retirement than a traditional home loan offers. For example, a traditional loan comes with ongoing small payments you have to make back to the lender. Missing payments could cause you to lose your home. A reverse mortgage actually requires you to stay in your home. At no point do you risk losing your home for lack of payment because payments are not due at set times.

Additionally, a reverse mortgage is beneficial because it allows you the flexibility to choose how to receive payments. You can, for example, draw from your available funds as needed through a home equity line of credit. That line of credit is like having an extra high-limit credit card. Alternatively, you can request immediate full payment of the equity available for you to borrow or you can request the money be doled out to you on a monthly basis to help you cover planned ongoing bill payments.

Where Reverse Mortgage Contracts Are Offered

Reverse mortgages are offered from many different sources, but it is important to select a source carefully. Some reverse mortgage scams do exist. In general, the best place to apply for a reverse mortgage is at a lender you can trust, such as the nationally known Wells Fargo. When you sign a reverse-mortgage contract you have more mental security than if you sign an agreement with a lesser-known lending institution. There are also federal lending institutions offering home equity conversion mortgages (HECMs) that are federally-insured reverse mortgages.

Reverse Mortgage Borrowing Limitations To Consider

When you apply for a reverse mortgage, it is important to consider the borrowing limitations. Your home has a certain value (equity). That equity is affected by many things, including its age and location. It is also affected by any existing property loans you have. Additionally, there are federal rules restricting how much of the available equity a lender can loan to you. A tool called a reverse mortgage calculator can help you juggle all those factors and figure out the total available to convert to cash. The reverse mortgage calculator uses specific formulas to come up with that figure.

Restrictions On Spending Your Reverse Mortgage Funds

You may be wondering how you can spend your reverse mortgage funds. First, the reverse mortgage calculator must determine the total funds available. Then you must take funds off the top to cover required initial expenses. For example, certain fees and closing costs must be paid at signing. Funds may also be subtracted to pay off your existing traditional loan, if you have one.

Once all initial fees are paid, there are really no restrictions on how you spend the remaining funds. You can use them to pay utility or medical costs. However, you can also use them for fun purposes, such as vacationing. The point is to make your entire retirement experience more comfortable. You have total flexibility regarding the best way to accomplish that goal.

Jonas Bronck is the pseudonym of the publisher, managing the content and operations of The Bronx Times.™ / Bronx.com - the largest daily news publication in the borough of "The" Bronx with over 1.5 million annual readers. Publishing under the alias Jonas Bronck is our humble way of paying tribute to the person, whose name lives on in the name of our beloved borough.