If you are looking into obtaining a reverse mortgage you may have some trouble understanding how they work. For example, there are several words associated with such loans that you may never have heard before. Yet, you must have a full understanding of how a reverse mortgage can benefit you or hinder you before applying for one. The information below can help you navigate the reverse mortgage world more easily.
Navigating the world of reverse mortgages
Defining What Makes a Reverse Mortgage Unique
The term “reverse mortgage” itself can be confusing. It comes from the fact that, if you apply for such a loan, you may receive money each month from your reverse mortgage lender rather than owing money back to them. If you were to obtain a traditional mortgage during your retirement you would have to make payments to the lender on an ongoing basis instead. The freedom of not having an extra monthly bill is part of what makes a reverse mortgage better for you during retirement. With no extra payment to make and more income your retirement can be more comfortable or enjoyable.
Where Reverse Mortgage Money Comes From
The money you will receive when you apply for a reverse mortgage will come from the equity in your home. Contrary to popular belief, the equity of your home is not always its exact worth. It is the value after certain expenses like existing mortgages are calculated. Additionally, even once your reverse mortgage lender establishes the current equity of your home you cannot borrow that full amount. You will only be given access to a portion of the equity as ready cash in the form of a reverse mortgage. The reason some equity will be inaccessible is because laws have been put into place preventing full amount loans.
Other Ways to Receive Reverse Mortgage Payments
Although the common way to receive reverse mortgage money is at an ongoing, steady rate, you do have other options. One is that you can obtain a lump payment one time. Such a large payment can be handy if you encounter a major emergency or have lofty retirement plans. For example, if you intend to take a major vacation you might need a large amount of money. A similar situation can arise if you intend to put an addition on your home.
A third alternative is to apply for something called a home equity line of credit. As the name suggests, it is a line of credit you can take out against the equity in your home. Setting up a reverse mortgage in such a way will allow you to request the amounts of money you need as you need them. However, a limit will be placed on the amount you can borrow in the same way that monthly installments or lump sums will be limited. The limits change occasionally based on current laws and economic circumstances.
How Reverse Mortgages and Home Equity Conversion Mortgage (HECMs) Differ
If you have heard of a home equity conversion mortgage (HECM) but don’t know what it is, the answer is that it is a reverse mortgage. The two names are used somewhat interchangeably. The only major distinction is that HECMs are typically offered by government organizations. Loans you can get from private local lenders typically do not go by that name. However, the typical terms of both are identical. Both are also often referred to as reverse loans or reverse home loans. Therefore, if you want government assistance with your mortgage during retirement you should look specifically for an HECM. But if you opt for a local loan you may not hear that term used.
If you are looking into reverse mortgages, I hope you have found this guest post useful – I certainly feel like I have learnt a lot!