How does a reverse mortgage work?
A reverse mortgage allows homeowners to borrow money based on the equity in their home. The loan amount is determined by the borrower’s age, the value of their home, and the current interest rate. Unlike traditional mortgages, the borrower is not required to make monthly mortgage payments. Instead, interest accrues on the loan balance over time.
The loan balance is due when the borrower permanently leaves the property. This can occur when the borrower sells the home, passes away, or moves out of the home for more than 12 consecutive months. When the loan becomes due, the borrower or their heirs must repay the loan balance in full.
When a reverse mortgage becomes due, there are several options for repayment. These include:
Sell the home The borrower or their heirs can sell the home to repay the loan balance. If the sale price is higher than the loan balance, the borrower or their heirs will receive the remaining proceeds. If the sale price is lower than the loan balance, the borrower or their heirs may be responsible for the difference.
Pay off the loan The borrower or their heirs can choose to pay off the loan balance in full. This can be done using savings, a new mortgage, or other sources of funds.
Deed in lieu of foreclosure If the borrower is unable to repay the loan balance, they may be able to transfer ownership of the property to the lender. This is known as a deed in lieu of foreclosure.
Foreclosure If the borrower is unable to repay the loan balance and the property is worth less than the loan balance, the lender may choose to foreclose on the property.
How much do I owe on my reverse mortgage?
The amount owed on a reverse mortgage depends on several factors, including the loan amount, the interest rate, and the length of time the borrower has had the loan. The longer the borrower has had the loan, the more interest will have accrued on the loan balance.
Borrowers can obtain an estimate of their reverse mortgage balance by contacting their loan servicer. Loan servicers are required to provide borrowers with an annual statement that includes information about the loan balance, interest rates, and fees.
A reverse mortgage can be a valuable financial tool for homeowners who are 62 years or older. The loan allows borrowers to access a portion of their home equity without having to sell their home or make monthly mortgage payments. However, when the loan becomes due, borrowers or their heirs must repay the loan balance in full. There are several options for repayment, including selling the home, paying off the loan balance, or transferring ownership of the property to the lender. If you have a reverse mortgage, it is important to understand the repayment process and to plan accordingly.