What is a Reverse Mortgage?

If you’ve made it here, it’s likely that you are wondering what a reverse mortgage is and whether it can help you. While this financial product is complex, it is not impossible to understand; it just takes effort. Your first step is to research, and since you’re reading this article, you’re off to a great start!

One common mistake that seniors make when pursuing a reverse mortgage is to only speak to one lender, often one that the senior found via an advertisement. However, since you are making such a big decision, it is a good idea to speak to more than one. You’ll get information, and if you do decide to move forward with the loan, you’ll be working with someone who you are comfortable with.

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Beginning in 2015, reverse mortgages will have a financial assessment for the very first time. This assessment is designed to ensure that any senior who uses this product can pay for taxes and homeowners insurance. Study your credit history. Obtain copies of your credit history and scores from the three major credit-reporting bureaus. Study your reports carefully to ensure that no issues or errors must be resolved before you apply. Your assessment will determine how much of your home equity you can tap into, so it’s important to come in prepared.

Before you get serious about the application process, take the time to organize all of your finances. Figure out how exactly you plan to use the reverse mortgage. If this seems a bit overwhelming, don’t worry – you are required to speak to a housing counselor before finalizing anything. Your housing counselor will help you sort out anything that seems confusing.

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Draw up a monthly budget and carefully examine the money flowing in and out of your household each month. It is important that you know whether you truly need the reverse mortgage or if you plan on using it as more of a rainy day fund. If you aren’t paying attention to your finances, you may not make an optimal decision.

You may be wondering about your options for receiving the proceeds of your reverse mortgage. Essentially, there are three options: a lump sum when you take out the loan, a monthly payment that you will receive indefinitely, or a line of credit that you can tap into at any time. Which option you choose will greatly depend on your circumstance. In our experience, a line of credit offers the most flexibility, giving you money that you can tap into should the need arise.

Do not be afraid to seek out assistance and financial advice. Though a reverse mortgage is certainly an option, it is not the only option out there. A home equity loan or home equity line of credit can accomplish many of the same goals, often at a lower cost.

You may have heard claims that reverse mortgages are government loans, government guaranteed, or some variation. Most reverse mortgages are part of a government program called the Home Equity Conversion Mortgage. These loans are insured by the Federal Housing Administration, or FHA. This provides protection to both the lender and the borrower, and it also creates a standardized product. You can think of the government’s role as similar to that of Freddie Mac and Fannie Mae in the forward mortgage market.

Hopefully we’ve answered a few of your questions about reverse mortgages. Remember, this is a complicated topic – these loans are certainly more complicated than the forward mortgage that you originally took out on your house – but they are not impossible to understand.

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