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How Do Reverse Mortgages Work? (In A Nutshell)
It used to be that even just a few years ago, reverse mortgages were viewed with suspicion: After all, these loans are marketed to homeowners who are at least 62 years old, and a lot of critics have charged that the lenders who handled the loans might be trying to take advantage of “the elderly” (really? 62 is elderly?) or that older consumers might not be able to fully understand the ins and outs of reverse mortgages. Of course, that last point could be said of anyone – mortgages of all types can be notoriously difficult to understand, no matter how or young or old you are.
But today, the attitude toward reverse mortgages has changed; even the Wall Street Journal notes the loans are being used – legitimately – by homeowners of all income levels who want to tap into their home’s equity without having the burden of monthly payments. As that article notes, while it used to be thought that reverse mortgages were used only by consumers facing potential financial difficulties, today’s reverse mortgages are regularly being used as tax shelters and as part of an overall investment strategy by seniors who are financially well off. Let’s dive in and answer the question, “how do reverse mortgages work?”.
Here’s a quick overview of the reverse mortgage process, including recent changes made to the rules that oversee the loan program:
- A reverse mortgage generally works like this: The homeowner gets access to their home’s equity without the need to sell their home or take out a loan that requires monthly payments; in turn, the bank gains an interest in the borrower’s home, and if the borrower moves elsewhere or dies, the bank gets that equity back through sale of the home.
- Like the traditional home equity model on which they’re loosely based, reverse mortgages come in a few flavors: as a lump sum, a line of credit or as a fixed monthly amount, and sometimes, as a combination of these.
- Most loans have no income requirements and in most cases, taking a loan will not affect your Social Security or Medicare benefits.
- Recently, President Obama signed a new, bipartisan bill into law that offers more protections for both lenders and borrowers. For instance, instead of just being required to participate in an informational session about the loans, today’s borrowers must have – again, free of cost – financial counseling to make sure the loan they get is the best one for their needs.
The moral: Don’t turn up your nose at reverse mortgages; no matter what financial situation you find yourself facing, these loans could offer you significant financial advantages.