Does Home Have to Be Paid for to Use Reverse Mortgages and How Do They Work?

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Equity you've saved in your home can be unlocked by a reverse mortgage.
Equity you've saved in your home can be unlocked by a reverse mortgage. (Image: Thomas Northcut/Photodisc/Getty Images)

If you are at least 62 years of age and own a home, you are eligible to consider a reverse mortgage. Instead of making regular payments as in a regular mortgage, you receive a payment, up to the amount of equity you hold in the home. Consider all the conditions and terms of a reverse mortgage before entering into such a contract.

Terms

Equity is the value of your home, less any outstanding mortgages and liens. If you own your home outright, your equity equals the home’s full market value. You may still have an outstanding mortgage, however, and secure a reverse mortgage.

Considerations

In a reverse mortgage, the lender makes a payment to you, instead of the other way around. The money is tax-free, and you can use it for any purpose. The loan is secured by the equity in the property. You can the loan in a lump sum, in regular payments or as a line of credit. You do not have to pay the money back until the home is sold. If you pass away, then the reverse mortgage lender takes title to the home and sells it, paying any amount it receives above the outstanding loan balance to your estate.

Limitations

The amount of the reverse mortgage depends on the home’s value and on other factors such as your age and the interest rate. The less money you owe on your home, relatively speaking, the more money you can get out of a reverse mortgage. The loan amount can't exceed the equity you have in the home. Interest is charged according to a standard interest rate index, plus a premium rate charged by the lender.

Other Liens

If you have paid off your first mortgage, but have taken a home equity line of credit or a second mortgage for any reason, you must pay down the balance to zero before you can get a reverse mortgage. Some lenders will allow you to pay off the lien with the proceeds from the reverse mortgage, but you can’t do it with another loan secured by the property.

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