How Reverse Mortgages Can Help Fund Your Retirement

How Reverse Mortgages Can Help Fund Your Retirement

By: Gen Wright

Reverse mortgages can help to improve the financial situation of an old person. An individual taking out a reverse mortgage will be able to live off the existing capital of the property. Here is how the process usually works.

Lenders or banks take pains to ensure that those intend to take up a reverse mortgage understand how the loan works. Individuals must go through a counseling session before they are allowed to sign up for the loan.

The name of the loan, "reverse mortgage", reveals a lot about the nature of the borrowing. The homeowner owns a property that he has been paying monthly installments for years. But this was when the homeowner was still young and had the capacity to earn a steady monthly income. However, the situation has now changed. With old age setting in, the homeowner can longer keep up with the monthly installments. But the property is worth something after all these years.

To qualify for a reverse mortgage, the homeowner must meet the following requirements.

1) Must be over the age of 62.
2) The home must be fully paid up, or must contain a reasonable amount of equity.

It is interesting to note that credit score is not important here. Credit score is used to assess the risk of the loan because the lender is undertaking a certain amount of risk by lending money to the borrower. In a reverse mortgage, the equity already exists in the property, so there is no risk on the part of the lender. Hence, there is no need to consider credit score. For this reason, this type of loan is easy to get approved.

Of course, there is no free lunch in this world. The lender makes money by charging an interest on the loan. However, it's comforting to know that there is often a ceiling on how high the interest rate can go. This cap is put in place so that borrowers can have peace of mind, knowing that the interest rates won't become unmanageable.

The loan amount depends primarily on the appraised value of the home, and how much equity has been built up over the years. The higher the value, the higher the loan amount. Of course, how much to borrow is up to the homeowner.

The actual loan amount may be far lower than the allowed amount. For example, the homeowner may be a side income. But this income isn't enough for his lifestyle. So he takes up a reverse mortgage to make up the difference. Remember, interest is being charged on the loan. So it doesn't make sense for the homeowner to borrow more than what is necessary.

Very often, the financial situation of older people may change. Many old people remain active and continue to work. At an old age, money is probably just a side benefit. They probably just enjoy working. They may not earn as much as before, but they continue to receive a monthly income. A reverse mortgage loan can be used wisely to manage the cash flow situation and allow these individuals to enjoy live their retirement years happily.

Learn more about Types of Mortgages. The different Mortgage Types can help you solve your home financing problems.

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