How Does a Reverse Mortgage Work?
This is a guest blog post from John McParland, vice president of Colonial Mortgage, a division of Ross Mortgage Corporation located in Livonia, MI.
In my last blog post, “How to Use a Reverse Mortgage to Your Benefit,” I shared how a reverse mortgage can help those over the age of 62 achieve financial security after retirement and live out lifelong dreams. Today, I’ll explain how a reverse mortgage works and answer some of the most common questions we receive from individuals considering a reverse mortgage.
Essentially, a reverse mortgage allows individuals over the age of 62 to tap into the equity of their home. While the funds obtained from a reverse mortgage can be used for virtually anything, most individuals use this money to enhance their financial security after retirement, offset monthly expenses, remodel their home or spend their golden years living out lifelong dreams.
The amount of money an individual is eligible to receive from a reverse mortgage is based upon their age. The older you are, the larger the percentage of home equity you are allowed to access—none of which is taxed as income. You can access this money in one lump sum, through monthly dividends, by establishing a revolving line of credit or any combination of these three methods.
Before you apply for a reverse mortgage, you must complete one counseling session with a HUD-approved counselor. After you receive a certificate of counseling completion, you can submit your reverse mortgage application. Similar to a regular mortgage application, you will need to provide your social security number, date of birth, residence address, income and assets. However, unlike a regular mortgage, there is less emphasis put on income or credit when processing a reverse mortgage application.
After you submit your reverse mortgage application, we order an appraisal to determine the value of your home. Once you’re appraisal is submitted and your application is approved, you need to make a decision on the terms of your reverse mortgage loan.
Similar to a regular mortgage loan, you can choose between a fixed or adjustable rate mortgage. This will determine the amount of interest that accrues over the life of your reverse mortgage loan, and will be added to the principal balance when the loan is repaid.
Unlike a regular mortgage, the interest rate program you choose has no immediate effect on your financial situation because you are not required to pay interest in the form of a monthly mortgage payment. And, based on the theory of property appreciation, the value of your property should increase enough over time to offset the interest you accrue over the life of your loan. You may even be able to repay your debt and pocket the extra money derived from increased equity.
The only time your reverse mortgage loan will “expire” is when you move, or move on. At this point in time, the sale of your property will be used to pay off your reverse mortgage loan. If your heirs will be handling the sale of your estate, you can feel comfortable knowing that you will not be passing on extra debt, because you are never required to pay more than what your house is worth.
After you’ve made a final decision on the terms of your reverse mortgage loan, you’ll need to complete the necessary paperwork required to close your loan. After closing, you have 72-hours to change your mind and rescind your loan with no penalty.
At Ross Mortgage, we coordinate every aspect of the reverse mortgage process, from counseling to appraisal, and can fully service your financing needs.
If you are interested in learning more about the reverse mortgage program, leave a comment below, or call me at 734.425.4520, and I would be happy to answer your questions.
John McParland is the Vice President of Colonial Mortgage, the Reverse Mortgage division of Ross Mortgage Corporation located in Livonia, MI. John has been a loan officer for 25 years and has been involved in helping thousands of seniors live a better life with the reverse mortgage program.