Just open your mailbox or flip on the TV. In your mail your getting tons of solicitations and on TV are recognized spokespeople talking about the reverse mortgage.
Even with all of this information being thrown at us most sixty two plusers can’t give a rudimentary explanation of how a reverse mortgage works.
That’s why I’m here. I’m the answer man and I’m here to educate.
The first thing to do is throw out any preconceived notion, anything you’ve heard from some guy, and keep in mind a reverse mortgage is nothing more than a mortgage on your home. The lender loans money using equity as security for its investment.
In this prior paragraph this definition could describe a traditional mortgage or a reverse mortgage. That is my point. I don’t want people thinking the reverse mortgage is much different than a forward mortgage.
Although these loans have their differences they are fundamentally the same.
The lender is loaning money to you. You get to use that money for whatever purpose you desire. It’s your money afterall.
That loan could be to refinance a current forward mortgage, cash to pay bills and other life expenses, or perhaps to make investments.
All I’m saying is the borrower taps the built up equity or money in the home to use for the borrower’s benefit.
The reverse mortgage is a popular tool to tap this money as the borrower need not repay the bank on a periodic basis.
Of course that begs the question, “how does the mortgage company make money?” Now we’re talking.
The lender simply doesn’t make money today. Instead of receiving monthly payments the lender lets interest accumulate on itself. It is the quintessential negative equity mortgage.
The bank is only repaid either when the borrower decides to make a full repayment or when the borrower dies and home is sold.
One thing I would like to get across is the bank never has ownership of the house during the course of the loan.
The reason why everyone is so hot and heavy for reverse mortgages is the fact no monthly repayment is necessary. That is great.
Its not all a bowl of cherries for the reverse mortgage. High costs and possible negative equity positions for the borrower are just a couple of the downsides.