How Does A Reverse Mortgage Work?

A reverse mortgage is something many older people considering choosing. When you get a mortgage for the purchase of a home, you will be required to make payments on it. The bulk of the payment will be for the interest while a smaller portion will go towards the principal.  As you reach the mid-portion of the mortgage duration, the bulk of your mortgage payment will be for the principal. So, essentially the amount of your principal loan will decrease, as the equity in your home increases.

With a reverse mortgage, the equity in your home could be turned into a cash vehicle. You have a few ways of getting the cash such as receiving it in one lump payment, or by having it deposit X amount of money to your account every week or you can create it as a credit account. The concept behind a reverse mortgage is quite similar to refinancing your mortgage. In both forms you will receive some sort of cash benefit. With refinancing your mortgage, you save money on your monthly mortgage payments. With the reverse mortgage, you are receiving money from the equity in your home.

You will still own the home, but you will now have another source of income. If you let the money transfer into your account on a weekly or monthly basis, it could be just like a side income. However, you should know that as you are taking out the money, the equity in your home goes down, while the principal loan will increase. The loan amount will not go over the amount of equity in the home, so you shouldn’t worry about that. Just make sure you know that the principal will increase, as you take out from the equity.

The amount of money you take out in terms of the reverse mortgage will need to be completely paid off at the time of selling the home. Now, you will only be allowed to it off in the end if you follow some guidelines. If you fail to make payments on your mortgage, taxes or insurance, the lender will ask you to pay back the amount of money you took from the equity. The same case will apply for those considering bankruptcy. At bankruptcy, your credit rating will be extremely affected in a negative manner. Getting a loan or credit card will be nearly impossible after a bankruptcy.

There are other ways by which you can use the equity in your home to get some money. Some people often mix up a reverse mortgage with a home equity line of credit. With home equity loans and line of credits, the borrower needs to make monthly payments for the interest they owe. Lastly, you should remember that the qualification for a reverse mortgage is very lenient, as you simply need to own the home and be at least sixty-two years of age.

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