Understand How a Reverse Mortgage Works
I was surprised, after asking the question of some family members following a statement by my elderly parents that they were considering a reverse mortgage for home improvements, that no one really understood how it were, and that went for my parents too!
Before obtaining any kind of loan, it's important to understand what's involved. In a nutshell, here's how a reverse mortgage works.
You can take out a reverse mortgage on your home, borrowing against its equity, if you're over 62 years old. Unlike a traditional home equity line or loan, the homeowner doesn't have to pay the money back in monthly installments, but at some time in the future.
To obtain a reverse mortgage, you can't have any liens against your home. Your line of "credit" depends on the amount of equity that has built up in your home over time.
After you qualify for a reverse mortgage, you have a variety of options when it comes to accessing your loan balance, again depending on your equity. You can get a lump sum payment for the entire loan amount, or you can set up equal dispersion of funds over a specified time period in months or years.
The funds can be automatically deposited into a bank account. Or, you can receive what is known as tenure payments, or regular monthly payments. Borrowers can also opt for a line of credit, much like a credit card where they can withdraw funds is necessary.
Before signing on any dotted line, understand the terms of the agreement, the pros, as well as the drawbacks, to reverse mortgages, as they will affect the equity of your home now and into the future.