A Guide to Reverse Mortgages – Frugal Novice

A Guide to Reverse Mortgages

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A Guide for New Reverse Mortgage Applicants

As you get older, it’s likely that your savings is going to get smaller, especially when you retire and are on a fixed income. At the same time, many of your expenses might get higher. Your medical bills might to stack up, or your long-time home may suddenly need a lot of maintenance all at once. Even if none of that is true, you may still want to make your financial future and your family’s more secure. One tool that can help you to accomplish any or all of those goals is a reverse mortgage.

Reverse Mortgages Are Not Standard Home Equity Loans

There is a big difference between a standard home equity loan and a reverse mortgage. When you take out a regular loan on your home, you must pay it back little by little each month. A reverse mortgage, or home equity conversion mortgage (HECM), may actually give you money each month. Alternatively, it may allow you to take out a lump sum of money.

Either way, you get money when you take out a home equity conversion loan, at least at first. The loan will eventually have to be paid off, but generally not until you sell your home or pass away. If you pass away while still living in your home with an outstanding HECM, the remaining balance will be taken out of your estate’s assets.

Why a Reverse Mortgage May be Helpful to You

Now you know what a reverse mortgage is, but what’s a reverse-mortgage actually useful for? Well, the main reason why a loan that converts your home’s equity into immediate money may be useful to you is that it’s almost impossible to default on the loan. You won’t owe any money until you die or move out of the home. Therefore, your home cannot be repossessed for no reason due to non-payment. It’s a loan option that offers a certain amount of financial and residential stability for you.

This sort of loan option is also great because you have the flexibility to use the money for almost any purpose that you can think of. Are you up to your ears in medical bills? Do you just want to set up some investments to make your retirement a little easier? Whatever your goal is, a reverse mortgage can help.

The Type of Borrower That Lenders Look For

Keep in mind that HECM lenders usually look for borrowers who own their own homes outright. If you already have another mortgage, it will probably need to be paid off in full before you can get a reverse mortgage. Also, it helps if your home is worth a fairly good amount of money. Inexpensive homes have very low equity, which means that there isn’t enough to borrow against. It’s also worth noting that reverse mortgages are usually targeted to those who are elderly. If you happen to be under the age of 62, you won’t qualify.

The Downside of Reverse Mortgages

The downside of a loan that is based on converted home equity is that the home will eventually be sold. Either you will sell it yourself or it will be sold when you pass away and the loan comes due. At that time, any money made from the sale has to be put toward paying back the loan. While there may be some money left, it won’t be as much as you or your family might like. So, that is definitely something to discuss with your family before you fill out the loan application.

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