Reverse Mortgage – The loan that pays you

“The tool of reverse mortgage is a tailored product to monetise the locked up ‘equity’ in the asset and lends support to the liquidity starved home owners.” To make things simple the lender makes monthly payment to the borrower instead of as with a traditional mortgage where the borrower makes monthly payments to a lender that too without having to dispose of the property. Doesn’t it sound a bit strange? Yes it does and it’s quite simple too.

Let us first understand what reverse mortgage is and how it works?

Suppose a retired couple with children settled in abroad and with the only possession that is their house. Though retired means living on pension, but what if they need more money for daily expenditures or for one time heavy expenditure for some luxury. They can’t sell the house, if they where are they going to stay? “Hey! Reverse mortgage is out there to help you”. The government has valued their property to be worth of 50lacs and present-day picture tells that they still owe 2.5lacs on an ongoing mortgage. So they went to bank asked for a loan in the scheme of “reverse mortgage”. And this couple decided to borrow 65% of the total property value i.e. 32.5 lakh worth. Next, set off the remaining mortgage balance that you still owe of 2.5lacs plus the processing charges and other fees of another, say 1lac. Now you have 29lacs in your hand. Either you receive this amount as monthly payments or lump sum for a one time heavy expenditure is up to you. What happens with the couple with a loan of 32.5lacs?

A reverse mortgage loan typically does not require repayment until the last homeowner has passed away or has moved out of the property. Consequently, life expectancy is a huge part of the calculation in regards to how much money the borrower will receive. In general, the older you are, the more equity you have in your home and the lower your mortgage loan balance; the more money you can expect from a reverse mortgage loan.

Reverse mortgage loans are insured by the Federal Housing Administration (FHA) and it requires the borrower to be a minimum of 62 years of age. Borrowers must also meet financial eligibility criteria as established by HUD. If there is an existing mortgage on the home, it may be paid off with the proceeds from the reverse mortgage loan.

Explaining reverse mortgage does not give an idea of the mortgage structure and the different sorts or the featured benefits or the disparaged drawbacks. That is coming up in the next session…

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