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Wondering how does a reverse mortgage work? If you have retirement concerns regarding how much spending money you will have when your income is reduced, you are not alone. Many retirees have those worries, which is why reverse mortgages are so popular.

Reverse mortgages are home loans you can only get when you retire or at least reach 62 years of age. You have probably heard a bit about them, but you may have a lot of questions about how they really work. 

How Does a Reverse Mortgage Work?

Some answers to top reverse mortgage questions are provided below.

How is the Borrowed Amount of a Reverse Mortgage Determined?

The amount you can borrow with a reverse loan is determined using a reverse mortgage calculator. It is a special online tool that factors in the many aspects of home values. A reverse-mortgage equity calculator is an important tool for you and your lender because it also takes into account current government regulations that cap the percentage of the total home equity that can be loaned. Those capping regulations are designed to prevent lenders from loaning more than they should.

What Are the Other Qualifications for a Reverse Mortgage?

Other than being 62 years of age, the main requirement to get a reverse mortgage is your home must be your full-time residence. It must also have enough value to borrow against.

Additionally, your reverse mortgage lender must verify your ability to take care of the financial responsibilities of homeownership, such as tax payments. That is the only way the lender can make sure the reverse mortgage is not a poor risk because you have to retain home ownership for the duration of the loan. Therefore, you may be required to pass a background check.

The home itself can be almost any house, but a mobile home is ineligible. If you own a home with multiple apartments, the maximum number of apartments allowed is four. You must live in one of them.  Leaving for temporary reasons, such as a vacation, is acceptable. However, as soon as you stop using the home as your primary residence the money you owe will be due in full.

How Can You Choose to Receive Your Reverse Mortgage Money?

There is a lot of flexibility when you obtain a reverse mortgage, especially in the ways in which you can borrow the money. One option is a single large payment your reverse mortgage lender can make to you when you have a significant financial crisis or need to fund an expensive retirement endeavor.

Another choice is to set up a line of credit to borrow against on an as needed bases. However, a very popular choice is to set up monthly installments the lender will pay to you. By receiving extra money each month, you will have a reliable income you can use to pay ongoing bills and other retirement expenses.

What Happens When You Leave Your Home?

If you leave your home, and you were the only one who signed the reverse mortgage agreement, the full amount is due, typically within six months of the date on which you leave. If that amount goes unpaid, the home is sold so the reverse mortgage lender can recover some or all of the owed amount.

If another person, such as your spouse, signs the loan agreement, the loan stays active as long as that person remains in the home. Anyone else living in the home when the last person to sign the agreement vacates the property must leave or pay the loan balance on behalf of you or the other loan signer to stay in the home.

The Bottom Line

A reverse mortgage is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash. Once you’re 62 or older, a reverse mortgage can be a great way to get cash when your home equity is your biggest asset and you don’t have another way to get enough money to meet your basic living expenses.

A reverse mortgage allows you to keep living in your house as long as you keep up with property taxes, maintenance, and insurance and don’t need to move into a nursing home or assisted living facility for more than a year.

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TopSavings Staff

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