A reverse mortgage offers many potential benefits when you retire, but only if you understand the finer points of applying for one. If you have heard about reverse mortgage, you may have also heard a lot of information you did not understand. The following are some definitions of common terms relating to reverse mortgages to help you understand the finer points of the application process.
Reverse Mortgage Versus Standard Loan
The first definition you must understand when considering a reverse mortgage is the definition of a reverse mortgage itself. A reverse mortgage is a mortgage unlike a standard mortgage in a few ways. For example, if you take out a reverse loan on your home, you do not have to pay any portion of it back right away. You also will not receive scheduled mortgage bills. Instead, your reverse mortgage lender will send you money monthly until the maximum amount you can borrow has been given to you.
Another difference between a reverse mortgage and a standard loan is a reverse loan is designed specifically for retirees or those of retirement age (62 or older). You cannot qualify until you reach 62 years of age. The purpose of the mortgage is to help you stay in possession of your home while padding your retirement income.
Reverse Mortgage Calculator
Another term you will encounter when considering a reverse loan is “reverse mortgage calculator.” It is a tool used to calculate the worth of your home. After doing so, the reverse mortgage calculator also calculates how much of that worth, also known as equity, you can borrow. The reason such a tool is necessary is there are many variables that can affect the total value of your home. There are also laws in place governing the percentage of that total you are allowed to request from your reverse mortgage lender.
Reverse Mortgage Versus Home Equity Conversion Mortgage (HECM)
If you are obtaining a reverse loan from a private lender, it is called a reverse mortgage. However, a government agency provides a home equity conversion mortgage (HECM), instead. The two are quite similar, except an HECM is government-insured. Both loan types are government-regulated in terms of how much can be borrowed.
Reverse Mortgage Home Equity Line of Credit
A home equity line of credit is one option when you apply for a reverse mortgage. It allows you to borrow against the value of your home in exact, as needed, amounts. It is similar to how a credit card works. The home equity line of credit is one of several reverse mortgage borrowing options. You can also request one large payment or collect monthly installments for as long as funds are available. The latter option may be the most useful if you know you cannot afford your monthly household expenses without assistance.
Reverse Mortgage Default
You may already know that defaulting is the act of not meeting the terms of a loan. For example, if missing standard loan repayments causes you to go into default, the lender can foreclose on your home. Defaulting on a reverse mortgage is much less likely because you are under no obligation to make scheduled repayments in the first place. However, you must continuously use your home as your primary residence to avoid defaulting on a reverse mortgage. If you cease living in the home, the balance you owe will be due right away.