During the recent economic crunch, senior adults are finding themselves in a financial crisis, like much of the younger generation. As a result, a reverse mortgage has become a popular way for the older generation to access equity they already have built into their home.
What is a Reverse Mortgage?
A reverse mortgage allows retirees to tap into the equity of their homes to access needed funds for expenses after retirement they do not have. In order to qualify for the homeowners’ loan, each occupant of the house must be aged 62 or older. There must also be a sufficient accumulated home equity, generally about 40%.
Like any home loan, there will be an interest rate involved. The interest accumulates each month and will be repaid once the loan comes due, in addition to the principal loan amount.
As a result of this unique type of home loan for seniors, the debt increases while the equity in the home falls. The more money that is distributed over the duration of the loan, the more the loan amount increases.
Distribution Options for a Reverse Mortgage Loan
Once the value of the home is determined, the lender pays the homeowner. This is the opposite of how traditional mortgages work, where the homeowner pays the lender.
These payments can be disbursed by the lender in one of three ways:
- Monthly payments are made to the homeowner
- A lump sum is paid to the homeowner
- A line of credit is extended by the lender, to be drawn from whenever the homeowner chooses.
The distribution options can be one of the above or a combination of them. For example, one can receive a partial lump sum initially and then receive monthly payments.
Reverse Mortgage Calculators Help Estimate
To determine if one has sufficient equity in their home, they can use an online reverse mortgage calculator. The following information is input into the calculator to determine if qualifications are met:
- The location of the property (determined by zip code)
- Birth date of the homeowner or homeowners
- An estimate of the home’s worth
- Once entered, the reverse mortgage calculator gives an estimate if the homeowner qualifies for the reverse mortgage and the payout estimates for the different distribution options listed above.
When Does a Reverse Mortgage End?
One of the benefits of a reverse mortgage is that it does not need to be repaid until the last surviving homeowner leaves the house. This can occur when the homeowner moves to a new location, such as to a retirement home, or when they are deceased.
Once the house is vacated, the homeowner or their heirs have 12 months to repay the loan and accrued interest on the loan. This is generally done when the home is sold. The remaining equity belongs to the homeowner or their heirs.
A reverse mortgage is a viable option for seniors who find themselves in a financial crunch. It is a unique home loan for seniors, which allows them to access the equity in their home and repay it upon their departure from the home.
Robyn Adams - Robyn Adams is a freelance writer. She graduated from the University of Central Oklahoma with a B.A. in Journalism. She also has a M.A. in ...
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