Reverse Mortgages

You may have heard about reverse mortgage plans and wondered whether or not they would be suitable for you and your financial situation. This article is designed to introduce you to this type of loan in order that you may understand precisely what it is, if you are eligible for one and whether it is the right type of arrangement for you.

What Are Reverse Mortgages?

A reverse mortgage is a type of loan that has been designed for senior home-owners. In the UK reverse mortgages are known as equity release plans, and for those in the U.S. this is a very good way to understand how this type of loan works. Reverse mortgages enable the borrower to access the equity that is tied up in their property, while they are still living within it.

How Do They Work?

When you apply for a reverse mortgage loan you are actually asking a lender to give you money based against the value of your property how much of your home you actually own. If your application for a reverse mortgage is accepted, you will be paid either in a lump sum or in a number of payments over time. In return though, you do not have to make monthly payments against the borrowed sum (as with a conventional mortgage). The payment for the loan (including interest) is taken from the sale of the property.

Repaying Reverse Mortgage Loans

In a conventional mortgage agreement, the money borrowed is repayed through regular interest and capital payments. Over a period of time the rate of interest levied decreases as the loan principal is gradually repaid. Upon reaching an agreed repayment term the actual amount borrowed is repaid and the borrower is left with 100% equity in their home. A reverse mortgage differs from this type of scheme in two fundamental ways. Firstly, the borrower does not have to make regular repayments, and secondly the loan is settled when the home-owner dies, goes into care or sells the property. The resulting funds from the sale of the property contribute towards repaying the reverse mortgage borrowed as well as interest charged against it.

The Application Process

In order to successfully apply for a reverse mortgage you must meet several conditions. Perhaps the most important criterion is that the pesron seeking the loan must be at least 62 years old. Home-owners of this age are likely to have equity in their property, which provides security against the loan. As a consequence, successful applications for a reverse mortgage plan do not rely upon meeting a certain level of earnings.

Most often, there is no condition within the reverse mortgage agreement that states you can only use the released funds for certain purposes: for the most part you can use the money for a special occasion such as weddings for your child or a special holiday that you have always planned, or perhaps a vehicle or any other consumable goods purchase. Having said this, you do have to settle any outstanding mortgage that you have on the property you wish to use to release the equity from. Your existing mortgage can be settled either through your own savings or through the reverse loan itself.

Taking Financial Advice

As with any financial agreement you should be sure to get the right advice. Entering into any loan agreement, especially one that involves your property requires a full knowledge of how the loan plan works and what you will be liable for should you run into unforseen difficulties or problems. Be sure to speak to an impartial financial expert who has been approved by the Department of Housing and Urban Development (HUD), to make certain you understand the full implications of reverse mortgages before you sign the dotted line.

Javier Melendez is a contributor to the Finance Owl, a website which aims to provide reviews about the finance world. A recent article he has written can be found here: Information On Reverse Mortgages.

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