Reverse Mortgages: What You Need to Know

There are many reasons you may need to apply for a mortgage on your home, and retirement is certainly one. When your income drops due to retiring, you may need a way to make up for some of that loss, at least temporarily. A traditional home mortgage offers immediate help, but it also comes with almost immediate consequences. A reverse mortgage provides more worry-free assistance on a long-term basis. Here is what you need to know before you sign up for one.

How Reverse Mortgage Funds Are Doled Out to You

When you apply for a reverse mortgage, you select from one of several ways to receive the funds. A common reverse mortgage application process involves setting up the agreement so you receive monthly checks. When you select that choice, it is somewhat like receiving regular working pay. However, the money is only provided to you for as long as funds are available. The total you can borrow is based on your total home value, also called equity.

If you have a large unexpected bill to pay, you might prefer to just borrow exactly what you need when you require the extra financial assistance. If so, you have two options. One is to request a single payment in the full amount available. Then you can spend the funds for whatever you require. The other is to set up a line of credit against your home equity, which you can treat like a credit card by borrowing exact amounts when you need them.

How Reverse Mortgage Repayment is Conducted

One of the major differences between a standard mortgage and a reverse mortgage is how fund repayment processes work. In the case of a traditional mortgage, you have to make payments by particular dates. Those payments also have specific minimum amount requirements you must meet. A reverse mortgage allows you to pay back the loan whenever you want with no particular schedule, as long as you continuously meet the conditions of the loan, such as agreeing not to move out of the house.

What the Reverse Mortgage Loan Period Is

Loans typically have loan periods. The term “loan period” refers to how long a loan lasts. A traditional mortgage has a concrete loan period laid out when you sign the contract. For example, you might have three or five years to pay back the loan in full with interest. A reverse mortgage loan period still exists, but it is much less clear. That is because the loan can stay active for as long as you stay in the residence. Therefore, the loan might last only a few years, but it could also last for much longer.

Fees You Must Pay When Obtaining a Reverse Mortgage

In general, reverse mortgage fees are similar to traditional mortgage fees. For example, you must pay closing costs. Those fees are often subtracted from what you can borrow, rather than charged to you after you borrow funds. You must also pay interest on a reverse mortgage, just as you would on a traditional mortgage. The difference is the total interest paid may be much greater due to the loan period being much longer.

The Long-Term Implications of a Reverse Mortgage

Before you get a reverse mortgage, you need to carefully consider the factors above, as well as all other aspects of the process. Reverse mortgages have several positive and negative long-term implications. For example, you may be physically tied to the property for many years. Although you can still go on vacations, moving is out of the question, unless you pay the loan back, first. Yet, there are also positive long-term implications, like being able to have the money you need and spend it with no worries for several years.

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