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Reverse Mortgage: What Is It and How Does It Work?

Before you borrow a reverse mortgage, here are a few factors you need to consider. That way, you can tell whether opting for a reverse mortgage is a good idea.

If you’re in the market for a new mortgage, you’ll probably hear one or two things about reverse mortgages. The name in itself sounds peculiar because how can mortgages work in reverse, and how does one qualify for a reverse mortgage?

If these questions have been wracking your brain, worry not; we’re here to help. In today’s post, we’ll be looking at everything you need to know about a reverse mortgage, including what it is and how it works. So let’s dive straight into it.

What Is a Reverse Mortgage?

A reverse mortgage is a type of mortgage available for people over 62 years. This mortgage allows borrowers who’ve already fulfilled their mortgage to get part of their home’s equity as untaxed income.

Reverse mortgages get the name because, unlike regular mortgages where the borrower pays the lender, it’s the lender who pays the borrower in reverse mortgages.

How Do Reverse Mortgages Work?

First off, it’s worth noting that homeowners can’t borrow their entire home value regardless of whether they fulfilled their mortgage completely. Instead, borrowers can only borrow a specific percentage of their home’s value. This amount is what is known as the principal limit.

There are tons of factors that affect how much of your home’s value you can borrow in a reverse mortgage. Some of these factors include:

  • The current interest rates
  • The age of the borrower
  • The age of the spouse (should also be eligible for borrowing)
  • The HECM borrowing limit

The lender uses a combination of these and other factors to determine how much the homeowner can borrow. As you’d expect, the higher the borrower’s property value, the more they can borrow. Also, older borrowers are more likely to get a higher principal limit because, with younger borrowers, the lender will have to pay more over the life of the loan, given their longer life expectancy.

Important Factors to Consider About Reverse Mortgages

Before you borrow a reverse mortgage, here are a few factors you need to consider. That way, you can tell whether opting for a reverse mortgage is a good idea.

  • Fees: Lenders will charge origination and closing fees for the reverse mortgage. Make financial arrangements for these payments.
  • Interest rate isn’t fixed: The interest rate is bound to change over time, specifically with reverse mortgages tied to financial indexes.
  • Interest isn’t tax-deductible: The interest fees on these mortgages aren’t tax-deductible throughout the entire loan period.
  • You still have to pay house costs: The house still belongs to you with a reverse mortgage. That means all house expenses like utilities, maintenance, and fuel costs are still your responsibility.

Contact Better Rate Mortgage

Consider the positive and negative aspects of a reverse mortgage before deciding. While this is a perfect plan for many St. Louis residents, it may not benefit every candidate. Our team can tell you about other options you have if the terms of a reverse mortgage don’t fit your needs. Let’s talk and see if a reverse mortgage is right for you.

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