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A reverse mortgage is an increasingly attractive proposition for older Americans who may be low on cash, need to supplement retirement income, and want to use their home equity to remain in the house they own.

What Is a Reverse Mortgage?

Reverse mortgages are loans that enable U.S. homeowners over the age of 62 to cash in on the equity built up in their home via a reverse mortgage lender.

That’s a tempting opportunity in an age where millions of U.S. seniors are struggling to save enough money for retirement. Data from AnytimeEstimate shows that 56% of Americans believe they will outlive their retirement savings, and 16% of Americans have saved zero dollars for retirement.

Even so, there are some risks involved in cutting a deal on a reverse mortgage (otherwise known as a home-equity-conversion mortgage.) Such mortgages are supervised by the U.S. Federal Housing Administration, an arm of the Department of Housing and Urban Development, so there is some level of regulatory scrutiny.

A closer look at reverse mortgages may provide some answers for Americans approaching their golden years but lack adequate retirement savings. Let’s kick some tires on reverse mortgages and see if there is a scenario in which this financial product makes sense for you.

How Do Reverse Mortgages Work?

Reverse mortgages are geared toward older U.S. homeowners who have accumulated a healthy chunk of home equity on their properties, and wish to leverage that value into retirement income. These mortgage products are the polar opposite of traditional mortgages, where mortgage payments are primarily paid on a forward and monthly basis until the mortgage loan is fully repaid.

Although that homeowner still has to pay property taxes and insurance on the home, unlike a regular, forward-modeled mortgage, reverse mortgage holders accept payments from a lender but don’t need to repay the money until he or she leaves the home or dies.

What homeowners lose with a reverse mortgage is the value of their home equity, which declines over the course of a reverse mortgage loan. Instead, the mortgage loan balance increases over time until the loan is either paid off or the homeowner leaves the home (in the vast majority of cases, a reverse loan is paid off when the homeowner sells the property.)

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Note that reverse mortgages are not the same as bank-sponsored home equity loans or home equity lines of credit. Unlike those mortgage-based financial instruments, a reverse mortgage does not require the borrower to make monthly payments (instead, they actually receive them.) With a home equity loan, the borrower pays down the loan monthly, at a fixed sum, until the loan is repaid.

5 Things to Know About Reverse Mortgages

Get to know reverse mortgages on a more detailed basis, with these five “must-knows.”

1. Eligibility Factors

By and large, it’s fairly easy to qualify for a reverse mortgage. You can do so if you clear the following hurdles:

  • You are 62 years of age or older.

 

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