A reverse mortgage works in a completely different way from a standard mortgage. Rather than moving into a property and paying for it over time, the occupants take out a loan on the equity of the property which they are already resident in, and the loan is cleared upon the death of the occupants. To find out more about a reverse mortgage and how it works, read on.
What is a reverse mortgage?
A reverse mortgage loan is an equity-based loan, whereby the occupants of a property take out a loan which is based upon the equity in their property. For instance, if a home owner has already cleared their mortgage on a property with a market value of £300,000, then they have an equity (in theory at least) of £300,000 and can take out a loan for this amount. They will not have to make any repayments on the loan. However, when they die the loan will be settled, prior to any payment made out to family members. How does a reverse mortgage work? The mortgage lender assesses the value of the property and provides an equity loan based upon a conservative estimate of the home's market value. Since the home owners could be remaining in the property for some time and property values sometimes reduce as well as climb, the mortgage company protects its interest by proving a conservative estimate on the property. So in the case of £300,000, they may provide a maximum loan of perhaps £250,000. Furthermore, the occupants have to be at least 62 years old. Finally, there are terms and conditions, so for instance, if the homeowner decides to leave the house, then they must sell the house and clear the loan. Moreover, the loan is given under the condition that the house be maintained and insured at all times. As for the loan schedule, the occupants do not have to pay out anything as long as they are alive, and they can receive the loan in one bulk payment or they can draw it down on a monthly basis if they prefer. The best reverse mortgages provide the homeowners with the option to draw down equity as they require. In this way, they only assume debt in an incremental way. This has ramifications after death, because the loan and its interest will have to be cleared prior to family members receiving any inheritance money from the sale of the house.
Reverse mortgages work well for many retired people. However, it is not a good product if the occupants decide to leave the property. Homeowners should think carefully about all possible ramifications prior to taking out a reverse mortgage.