A Broad Overview of How a Reverse Mortgage Works

Those who have been paying attention to the financial news recently have probably seen a lot of commercials for something called a reverse mortgage.

Many times, when people hear advertisements for various financial products, it can be hard to understand exactly what they mean. Therefore, it is important for everyone to understand the basics of a reverse mortgage before they decide to jump into them.

What is a Reverse Mortgage?

For those who might not be aware, this is a tool that is being aimed at people who are nearing the age of retirement. It also goes by the name Home Equity Conversion Mortgage. In this tool, a reverse mortgage allows the homeowner to draw on the equity they have in their home.

Given that most people who are nearing the age of retirement have likely been paying into their home for a long time (or have already paid it off completely), there should be some equity on which they can draw. In exchange for removing equity in their home, they establish a monthly income.

They can also set up a line of credit or even take it as a lump sum. In this fashion, a reverse mortgage is a tool that people can use to make their finances last throughout the length of their retirement. This is why so many senior citizens have made the switch to a reverse mortgage.

An Overview of the Types of Reverse Mortgages: FHA and Non-FHA

In general, there are two broad categories of reverse mortgages. The first is the FHA variety. This is issued by the Federal Housing Administration. This falls under the authority of the Department of Housing and Urban Development (HUD).

The other type of reverse mortgage is called a non-FHA jumbo reverse mortgage. This one often allows for higher property values and loan amounts.

While the type of mortgage option does provide more options, it is also not insured. It is important for everyone who is interested in this financial tool to review it with a professional before moving forward.

Common Misconceptions about a Reverse Mortgage

Before people think about signing up for this financial plan, there are a few common misconceptions that people might hear regarding a reverse mortgage.

The first is that many people think that by drawing on the equity in their home, they are signing it away to the bank. This is not true. The homeowner’s estate will still retain to the title to the home.

Another common misconception is that people think their heirs are going to take on a lot of debt as a result of the reverse mortgage.

This is another common mistake. A mortgage in this fashion is actually something called a non-recourse loan. This means that the individuals who inherit the home cannot owe anything more than the value of the home.

If worst comes to worst, the heirs can actually sell the home to repay any of the loan that is left. Then, the remaining equity is still theirs. Think about these points when deciding whether or not a reverse mortgage is the right financial move.