Tips to help you understand, How Does Interest Work On A Reverse Mortgage?
A reverse mortgage is a program created by the federal government to help senior homeowners (62 and over) maintain their residence while receiving monies for their home; as if it was sold. The program is as it states; a reverse mortgage. On a normal mortgage, interest and principal decrease as mortgage payments are made by the mortgagee. On a reverse mortgage, interest and principal increase as payments are received by the mortgagee. It is confusing how the numbers work and generally begs the question, How does Interest work on a reverse mortgage?
Increasing Principal
Usually when someone purchases a house, the goal is to pay off the house. Paying off the house ensures that the owner will live payment free (aside from taxes and insurance). With a reverse mortgage, it works just the opposite. A paid off or partially paid off residence is used for collateral to begin paying the homeowner. As payments are made to the homeowner, the principal balance increases. As the principal balance increases, so does the interest on that principal balance. But, what happens to that interest. How does interest work on a reverse mortgage?
How Does Interest Work on a Reverse Mortgage?
While principal is increasing on the mortgage, so does the corresponding interest. However, the interest is never paid by the homeowner. As long as the homeowner continues to live in their house, pay taxes, and maintain insurance on the residence, the residence is considered owned free and clear (in terms of payments). The homeowner never pays any principal or interest payments; great for seniors. In return, the home is put up as collateral. When the homeowner moves out of the house or is deceased, the home becomes property of the lender.
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