Reverse mortgages are a loan that converts an intangible asset, home equity into a tangible asset, namely cash. The owner keeps their home for life.
The major benefit of reverse mortgages.
Reverse mortgages are designed for senior citizens whose finances is in a cash poor and house rich scenario. It is only for people 62 years of age or older. Since many Americans most valuable asset is their home this can be a godsend for many senior citizens. The cash can be used for any purpose; home improvements, annuity purchases, property taxes, medical expenses or even a vacation.
Are there any other benefits from reverse mortgages?
The homeowners do not have to give up their house or repay on the mortgage during their lifetime. All they have to do is stay in the house, keep taxes current and maintain the house in good repair.
So where do the funds come from?
The funds are provided by a lending institution such as a bank or mortgage company. This is very similar to regular home mortgages except for the borrower’s repayment method. Regular mortgages require monthly payments and can be foreclosed if payments are not made. With reverse mortgages, the principle and any accrued interest will be paid when the house is sold. Unless the owner sells voluntarily, no payment is required until the owner dies or is admitted to a long term care center for 6 months or more.
What happens if the house value has declined below the loan amount?
Most lenders require an insurance policy to cover any shortage between the loan balance and the sale proceeds. Otherwise the lender would have to absorb the loss. In most cases the sale proceeds will exceed the loan payoff. The remainder goes to the estate to be paid to the heirs.
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