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What You Need to Know About Reverse Mortgages

Applying for a reverse mortgage during retirement can be a confusing process. What is it? How does it work? Those and other questions must be answered before you sign your name to a mortgage agreement. Here’s what you need to know about reverse mortgages before you choose to get one to provide you with financial assistance when you retire.

Reverse Mortgages Versus Traditional Home Mortgages

There are a couple things that make reverse mortgages different from traditional mortgages. One is that a reverse mortgage is only available to you when you reach retirement age. Another is that you do not have to pay small amounts back throughout the duration of a reverse mortgage contract. In fact, depending on the terms you select, you are likely to receive the same set amount each month from the lender until you exhaust the percentage of home equity you are legally allowed to borrow.

Since reverse mortgage payments will be made to you instead of you having to make them to a lender  they will be useful to you during retirement. Without an additional bill to pay you can simply spend the money you receive to cover expenses or fun aspects of your retirement, such as vacations. You will not be obligated to spend the money for specific purposes.

The Extent of Reverse Mortgage Income

When you apply for a reverse mortgage you will be borrowing money based on how much your home is worth. However, you cannot borrow the full value of the home. A reverse mortgage calculator tool can determine roughly how much  money will be available to you. Reverse loan calculators use specific formulas to make such calculations. Those formulas factor in government limitations and expenses that must be deducted from the home’s value. For your protection and the protection of your lender laws exist requiring such calculations. That way the full value cannot be borrowed, leaving you too deep in debt and the lender unprotected if you do not pay what was borrowed back. 

Ways Reverse Mortgage Money Can be Distributed

Two of the most common ways reverse mortgage money can be distributed are in a single payment or in steady, regular payments. Regular payments can help you during retirement if you need extra income coming in for monthly expense payments. A lump sum may be more helpful to you if you have an unexpected medical expense or home repair to pay for. However, you can also use such a payment to take an extended trip or for any other purpose. There are no rules regarding the end uses of the money you receive.

If neither of those options sounds good to you then you pay prefer a home equity line of credit. That is an agreement with the lender that will allow you to draw up to a set amount in small increments as you need it for some purpose during your retirement. Setting up a home equity line of credit reverse mortgage agreement is somewhat like having an extra credit card because you can take money out in changing amounts at various times.

Home Equity Conversion Mortgages Versus Reverse Mortgages

If you have heard the term “home equity conversion mortgage” or the term “HECM” you may be wondering if it is different from a reverse mortgage. The answer is yes, and no. The agreements are more or less identical. However, the term “HECM” is usually used by a government lending agency. The term “reverse mortgage” is more likely to be used by a local lending company with no government affiliation.

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