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Sunday, January 12, 2014

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With the population getting elder, and that wave of baby boomers reaching retirement age and beyond, a new way to lend and borrow money was required. Not every single retiree would have a surefire retirement plan or enough savings to continue on for twenty years or more.

However, many retirees do have homes that are paid off or mostly paid off, and this is where the mortgage industry stepped in and created a brand new product as a solution to the problem.

What Is a Reverse Mortgage?

A reverse mortgage is a loan where the homeowner borrows money with their home as collateral just like any other mortgage. However, in this scenario the borrower already owns the home and several of the regular rules and parameters don't apply.

For one, someone taking out a reverse mortgage does not have to make any payments on the loan and their credit history is largely irrelevant. Since there are no payments, there doesn't have to be any income, either. The person taking out the mortgage has the amount of the loan to use as their living money throughout their retirement years. Since the home is being used as collateral for the loan, the condition is that it must be sold when the owner passes away or decides to move, in order to repay the mortgage. Sometimes, the heirs are able to decide whether they want to sell the home to repay the mortgage or just repay the loan themselves and keep the home.

How Does the Process Work?

Naturally, a reverse mortgage is a welcomed option for many retirees who own their own home. It enables them to access a large amount of cash at a time when they might not have much to go around. Of course, an agreement like this must have several legal parameters in order to benefit both the borrower and the lender.

To begin, a lender in a reverse mortgage situation must guarantee that the balance of the loan will never exceed the fair market value of the home. Meaning, the borrower can never owe more than the home is worth. This enables seniors to access their home's equity without worrying about future market values and fluctuations.

To be eligible for a reverse mortgage, you must be at least 55 years old and if you have a spouse, he or she must also be at least 55 years old. The minimum amount for a reverse mortgage loan is $20,000 and the maximum is $750,000. The amount the borrower gets depends on age, value of the home and location of the home. An independent home appraisal is carried out to determine the home's value. None of the closing costs of the mortgage are paid for out of pocket by the borrower.

All of the money received by the borrower in a reverse mortgage is tax-free and the loan amount has no effect on any government benefits the borrower may be receiving. As long as the borrower and his or her spouse are living in the house, no monthly payments are required.

Some Common Misconceptions

Some people see a reverse mortgage as a way for banks and other lenders to take advantage of elderly people, and as such there are many misconceptions about the process.

Many people believe that the lender owns your home once the money is loaned out. This is not true, as the borrower remains on the title as the owner of the home. You have to pay your property taxes and have the necessary insurance up to date, but you own the house.

Some people think that the closing costs are extraordinarily high and will take a big chunk of your mortgage loan. In reality, the fees are similar to any other mortgage product and will vary depending on who you hire for legal advice and other services. And since the fees do come off the total of the mortgage, no out of pocket expenses ever incurred.

You cannot be forced out of your home as long as you or your spouse are alive and living there. Since there are no monthly payments, there is no way the lender can foreclose. If you live until you are 120 years old and choose to remain in the house, that's up to you. You can also use the loan amount for whatever you want to spend it on. You are not restricted in any way to what you spend it on. Most use it for living expenses and just enjoying their golden years, but it's entirely up to you.


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