Many people wonder "What is a Reverse Mortgage." While the answer is simple, it can be complicated to explain. So before we waste your time by answering what is a reverse mortgage, first make sure you can qualify for one.
Who Qualifies for a Reverse Mortgage? You must be at least 62 years old and own your home ("A New Kind of Loan in Reverse"). The home you would like to take out a reverse mortgage for must be your principal residence, meaning that you live in it at least six months out of the year ("Frequently Asked Questions"). Normally, people are unable to get a reverse mortgage if they live in a cooperative apartment or a mobile home; however, people living in a manufactured home that is built on a permanent foundation and meets other requirements may be able to qualify for a reverse mortgage ("Frequently Asked Questions"). In addition, there are no income requirements for a reverse mortgage ("A New Kind of Loan in Reverse").
What is a Reverse Mortgage? By the age of 62, many people own a large portion of their home, if not all of it. After years of making monthly payments, their home has become one of their most valuable assets that is worth a large amount of money. But unfortunately, in the next 10, 20, 30 or even 40 years, their homes will no longer be useful to them. They will either move to a new home, go to a nursing home or die. So instead of waiting until they no longer need the home to make the money they would receive from selling their home in the future, some people over the age of 62 choose to get a reverse mortgage.
The best way to understand how a reverse mortgage works is to imagine that you have 20 diamonds. You like the diamonds and would like to continue wearing them for the next 10 years, but after 10 years you will be sick of them and plan to sell them. When you sell those diamonds, you will make a very large amount of money. However, you do not want to wait until you sell them to make the money because you could use the money now. So you go to a lender and say, "These diamonds will sell for $40,000 in ten years. If you give me $30,000 now, I will repay the $30,000 when I sell the diamonds and pay you an extra $5,000 in interest because you gave me the loan."
That is how a reverse mortgage works. When you get a reverse mortgage, your lender gives you a portion of how much your home is worth and then when you no longer live in your home you are expected to repay the amount of money they lent you and the interest they charged you. Normally, when you repay your reverse mortgage, you use the proceeds you earn from selling your home. Luckily, reverse mortgages are made to work to your advantage. If your home sells for more than the total of your reverse mortgage, you get to keep the extra money ("About Reverse Mortgages"). If you do not make enough money from the sale of your home to repay your reverse mortgage, do not worry. You will only owe the amount you make from selling your home, because the total amount of the money you owe on your reverse mortgage can never exceed the value of your home ("Frequently Asked Questions").
Basically, reverse mortgages can be a win-win situation for you. If you budget correctly and do not need the proceeds from selling your home in the future, a reverse mortgage can give you extra money during the years when you can really enjoy it.
But don't think the question "what is a reverse mortgage" has been completely answered. Reverse mortgages are much more complicated than that. To read about the different types of reverse mortgages, read the next article in our mortgage guide
Step 2: Types of Reverse Mortgages.
The rest of our Reverse Mortgage Guide:
