By: Edward McCarthy
President: Sell By Owner Listings, Inc.

Understanding a Reverse Mortgage Loan

Homeowners over the age of 62 are able to take advantage of what is known as a reverse mortgage loan to add to their monthly income. A reverse mortgage loan allows the homeowner to take advantage of the equity in their home by converting it into tax-free income. The homeowner is able to do this without having to sell their home, give away the title, or incur a new mortgage payment.

The process is known as a reverse mortgage loan because the flow of money is reversed. Instead of the homeowner paying the lender, the lender pays the homeowner.

Once the homeowner has been approved for the reverse mortgage loan, there are several options for how the money can be received. A lump sum payment, fixed monthly payments, a line of credit, or some combination of the tree are the options available. Most homeowners choose to obtain a line of credit because it allows the homeowner to draw on the loan whenever he or she chooses.

When the homeowner takes the reverse mortgage loan as a line of credit, the unused balance has a growth feature. This growth feature is not interest accruing on the house. Instead, growth in the account is based on the assumption that your home has appreciated over a certain period of time. Not all reverse mortgages have this growth feature. Only those mortgages obtained through the FHA Home Equity Conversion Mortgage program have the growth feature.

The amount of money you obtain from a reverse mortgage loan depends on several factors. These factors include your age or the age of the youngest spouse, the appraised home value, the lending limit in your area, and current interest rates. The amount you can receive is maximized by an older age, a higher value of the home, and a lower amount owed on the home.

Several different kinds of homes can qualify for a reverse mortgage loan. Single-family homes, manufactured homes built after June 1976, 2-4 unit properties, townhouses, and condominiums are all eligible for a reverse mortgage. Most co-ops are not eligible for a reverse mortgage loan.

A reverse mortgage loan can be used for virtually anything you deem appropriate. Once you are approved for and have received the funds, the decision to use the money is entirely yours.

Even if you have an existing mortgage, you can qualify for a reverse mortgage loan. The only stipulation applying is that your existing mortgage must first be repaid. You can do this using the reverse mortgage. Whether you are able to completely pay off your existing mortgage with the reverse mortgage loan will depend on the amount of the reverse mortgage loan for which you qualify. In some cases, you will be able to completely pay off your existing mortgage without having to supplement with any of your own funds.

Once you receive a reverse mortgage loan, it does not affect your existing government assistance like Social Security or Medicare. In some cases, the proceeds from the reverse mortgage could increase your income and impact your eligibility for Medicaid. To avoid losing Medicaid eligibility, you will need to spend your proceeds immediately.

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