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Reverse Mortgages: The Nuts and Bolts

If you are over the age of 62 and looking for some quick cash, be it to pay off credit card debt or just retire a little more comfortably, then a reverse mortgage is an option that should be seriously considered. Although it is not recommended to jump straight into one on a whim, a reverse mortgage can be used most effectively by those who have their backs against the wall.

Most people understand that they are using the value of their home to get monthly payments, a line of credit, or a lump sum, but most people don’t know exactly how or why it works. To avoid getting into a situation that is harmful to you and your loved ones, it is paramount that you understand exactly how reverse mortgages work. Only then can you realistically evaluate your option for extra money.

The Tradeoff

In essence, you are leveraging the existing equity in your home and receiving payments for it. What does this mean? First of all, it obviously means you have to have existing equity in your house. It does not mean, though, that you have to have your house completely paid off. The remainder of your payments can be made using money received in a reverse mortgage.

The main restriction in getting a reverse mortgage is that the home must be your primary place of residence. If you are planning on moving in the near future, this is obviously out of the question. With this requirement comes a fantastic benefit: you do not need to pay off the loans until you move to a nursing home or die. The downside is that a significant portion of the equity will not be given to you. In fact, the actual payout you receive will almost undoubtedly be lower than half of the remaining equity in your home.

It is important to realize that there are fees that must be paid to keep your reverse mortgage. For example, the interest on the loans must be paid off as you go. On top of this, you are required to maintain your house by paying property and related taxes.

What Happens to My Estate?

This is where things start to get tricky. As previously mentioned, the loans must be repaid upon death. If you are the sole signer of the reverse mortgage, then your spouse may be left out in the cold if he or she outlives you. For this reason, it cannot be recommended enough to make sure you and your spouse both sign a reverse mortgage contract if this is the path you decide to take.

After the last signer on a reverse mortgage passes away or moves, the lender owns the equity in the house that has already been paid out for. In other words, there may be some remaining equity you did not receive payment for; this will be given to the heirs or back to the borrower. The heirs will also have the option of paying off the loans (plus interest) and keeping the estate upon the death of the borrower.

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