Arizona Reverse Mortgage >> Definition of "Reverse Mortgage"
What is a reverse mortgage?
Updated 1/25/08: Reverse mortgages (also called home equity conversion loans) enable homeowners to tap into their home equity without having to take out a traditional loan (like a new mortgage) or sell their home.
Most people who take out a reverse mortgage tend to be retired and to have a home that is fully paid off. They may be on a fixed income- a pension, social security- and a reverse mortgage raises their monthly income considerably. It is also tax-free income.
There was a time when people would enter their "golden years" and they would have to sell their home to supplement their social security checks. My own grandmother did this very thing and moved into an apartment. What a shame! Of course, this was before reverse mortgages were an option.
The book pictured on the left, entitled The Reverse Mortgage Advantage: The Tax-Free Way to Retire Wealthy is an outstanding reference to help you fully understand how reverse mortgages work. Or, feel free to give us a call at (877) 551-8188, extension 83, and we will be happy to explain anything that this web page may not cover.
A reverse mortgage is pretty much exactly what it sounds like:
Instead of the client making monthly mortgage payments to the bank, the bank makes monthly mortgage payments to the client.
So let's say you had a home that was completely paid off and it was worth several hundred thousand dollars. Instead of selling that home or taking out a new mortgage on it, the bank will send you a payment each month and take away a little of your home equity each month.
We had one borrower who was struggling to live with his $2400 social security check. He took out a reverse mortgage with us and now he gets another $1600 each month from the bank. He is living quite comfortably with $4000 per month and he didn't have to sell his home!
The lender pays you money based on the equity you've accrued in your home; usually in the form of a monthly payment. Repayment is not necessary until the borrower sells the property, moves into a retirement community or passes away. When you sell your home or no longer use it as your primary residence, you or your estate must repay the money that you received from the reverse mortgage (plus interest and other finance charges).
Still want more information? Okay!
The following definition of a reverse mortgage was paraphrased from Wikipedia:
A reverse mortgage is a type of mortgage loan available to seniors, used as a way of converting their home equity into monthly cash payments while still retaining ownership of the property and avoiding monthly payments.
Repayment of the loan is deferred until the borrower is no longer living in the home (or passes away).
In a typical mortgage, a home owner pays a monthly amortized amount; after each payment, the owner has more equity in the house. After a certain amount of time (typically 30 years), the mortgage will be paid in full and the property released from the debt. With a reverse mortgage, the homeowner receives a check each month. The monthly payment and the interest owed to the bank is subtracted from the equity of the home each month. In other words, for every payment that is recieved by the borrower, the equity in the home decreases.
In the United States a reverse mortgage must be the first and only mortgage on the property (if there is an existing mortgage, it will be paid off with some of the proceeds from the reverse mortage). If the property increases in value, the reverse mortgage may be refinanced to borrow more against the increased equity- that is, as the value of the home rises, the borrower's monthly payments from the bank can be increased, as long as the borrower refinances.
Any more questions? Send Karen an email at karen.george@azwm.com
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National Wholesale Mortgage, Inc. is an Equal Housing Lender.
