What Is the Definition of a Reverse Mortgage

From LoveToKnow Mortgage

What is the definition of a reverse mortgage? This type of loan may be difficult to understand initially, but once you get the facts it is not a hard concept to grasp.

Reverse mortgages aren't suitable for everyone.

Reverse Mortgage Basics

A reverse mortgage is different from a traditional mortgage. While a traditional mortgage is used to purchase a home, a reverse mortgage is used to tap into the equity of a home to provide the homeowner with funds either as a monthly income or in a lump sum. Reverse mortgages are different from equity loans as well. Although reverse mortgages do indeed utilize the equity in a home like an equity loan or line of credit, unlike an equity loan or line of credit there is no monthly payment required. The payment on a reverse mortgage comes due when the borrower moves out of the home as a primary residence or dies.

These loans are only available to homeowners who are aged 62 or older. Since these special mortgage loans are designed for seniors in order to offer them a viable source of income after retirement, people who are below the age of 62 are not eligible to receive a reverse mortgage. This remains true even for younger homeowners who have abundant equity within the home or even if it is completely paid off. Anyone under age 62 who wants to access the equity in their home should look into a home equity line of credit or home equity loan, which will allow them to receive cash for equity.

So What is the Definition of a Reverse Mortgage?

A simplified explanation of what is the definition of a reverse mortgage is this: A reverse mortgage is a loan that uses home equity as collateral and additionally does not require payback until the borrower moves from the home as a primary residence or dies.

Why is a reverse mortgage such a special type of loan? The main difference between a reverse mortgage and a traditional mortgage is the fact that the borrower does not have to make a monthly payment on the mortgage. In fact, in instances when the homeowner stays in the home as a primary residence until death, the homeowner never makes a single payment. In this instance, it is the estate that is responsible for the debt and the lender assumes the right to the amount owed.

Advantages

This type of loan has obvious advantages for borrowers. Seniors who have an abundance of equity in their homes from years of making payments – yet who do not have substantial additional income – can tap into the equity and not have to worry about budgeting for a monthly payment for the loan. Indeed, income from a reverse mortgage loan may be enough to allow seniors to continue residing independently within their own homes instead of moving in with family or downsizing to a smaller residence.

Disadvantages

The main disadvantage to a reverse mortgage is the loss of valuable equity within the home. Once that money is tapped into, it is no longer available as a financial safety net. Additionally, borrowers can no longer will the entire value of a home to heirs because it is no longer available to give. When a reverse mortgage is present, the lender is the first entity entitled to the funds that will pay the debt of the loan.

Getting a Reverse Mortgage

Before applying for a reverse mortgage, potential applicants are required to discuss their options with an FHA-approved reverse mortgage counselor. This professional will be able to answer any questions and to help potential borrowers figure out if a reverse mortgage is right for them.

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