Many individuals who retire acquire most of their income from social security, pensions, and retirement accounts they have built over the years. However, these income streams may not be enough. Many of these retired individuals find themselves struggling no matter how well they budget their money.
When this occurs, they look into a reverse mortgage line of credit. What a reverse mortgage does is it allows the homeowner to take their homes equity and covert it into cash. In other words, that equity that was built up through mortgage payments is paid back to the homeowner as income.
This is not like the traditional mortgage, such as a home equity loan or second mortgage, because the borrowed amount does not have to be repaid until that home is no longer used as the primary residence. The loan amount can also be more because of the age of the borrower, which is due to the amount of equity that has been accumulated throughout their life.
The reverse mortgage borrower does not have to have excellent credit to obtain the money, nor do they have to have a steady income. The most important stipulation is that the person looking to borrow owns the home.
The opposite of the reverse mortgage is the forward mortgage. This is the type of mortgage that is used when the house is purchased. This is when the borrower should have good credit and a steady income source. If the payments are not made on time, the home can be foreclosed upon because it is the home, or asset, that secures the mortgage.
As the forward mortgage payments are made, the homes equity grows. This is because the equity is the difference between what has been paid into the mortgage and the original amount of the mortgage. The homeowner will own the home once the final payment has been made.
However, the reverse mortgage, which is the opposite of the forward mortgage, results in an increase of debt as the equity decreases. There are no monthly payments being made, but the equity is being consumed because of the interest that is added to it as the money is borrowed.
Eventually, this mortgage must come due and there could be a large amount owed, depending on the length of the loan. If the value of the home has decreased at any point, it is very possible that there may not be any equity left to borrow from. If the value of the home increases, then there will be more equity to borrow from.
When it is time for the loan repayment to come due, it is usually because the homeowner is selling the home and will not be using it as their primary residence anymore. They usually move to assisted living facilities or an apartment that makes moving around easier. The money that is used to sell the home is usually used to pay back the equity that they have borrowed.
So for those wondering what separates a reverse mortgage from a forward mortgage, this should explain that. This should also help to make the decision of whether or not to add to monthly income by using a reverse mortgage line of credit.