by Edwin Ivanauskas | Tags: Personal Finance, Loans

A reverse mortgage is a unique financial instrument available to older people who have equity in their home.

Why would someone want a reverse mortgage?

The basic explanation of a reverse mortgage is that it allows a homeowner to borrow against the home they own and live in and repay the loan only when they die or sell the home. This allows older folks and retirees to tap into their home's equity to help with retirement or get through more difficult financial times.

How a reverse mortgage works

A reverse mortgage has quite a few requirements that must be met including:

• The borrower must be at least 62 years old.
• The current mortgage must first be repaid from funds acquired through the reverse mortgage.
• The borrower must go through a counseling session with a HUD approved counselor.
• The maximum loan limit is $625,500.

The amount someone is allowed to borrow is affected by:

• The borrowers age - older borrowers can borrower a larger amount
• The value of the home - the higher the home's value is the more money a borrower can get.
• The interest rate - The borrower will be paying interest on the loan and a higher interest can limit the amount borrowed.

Unlike traditional loans, reverse mortgages do not require a certain income or credit score. A reverse mortgage does come with a set of fees that can decrease the amount of equity the borrowers can get from their home. These fees include the interest rate over the life of the loan, origination fees, and closing costs. In addition, the borrowers are required to take out an insurance premium equal to 2% of the home's appraised value with .5% added for the balance of the mortgage.

A reverse mortgage can be a good way for older people and retirees to get through a hard time in their life or help supplement their retirement income. But it is important to be knowledgeable about the process to avoid getting into more serious financial trouble than they started. Some unscrupulous lenders will attempt to get the borrower to take out a reverse mortgage only to use the money on another investment which will net that lender more money, these should be avoided. Congress put in many of these requirements to help protect reverse mortgage borrowers and the required financial counseling through the HUD is the foremost of these measures.

Share with »