What Is Reverse Mortgage and How Does It Work

What Is Reverse Mortgage and How Does It Work

A reverse mortgage is a great way to create much needed cash when you find yourself not having enough to cover all your expenses during your retirement years. You have some choices for making more money, which sadly includes going back to work, at least on a part-time basis.

There are some other lucrative choices, however. For instance, if you’ve owned your own home for decades and paid on the mortgage religiously, month after month, you can apply for a reverse mortgage which will allow you to tap into all that lucrative equity you’ve been building up for years and years.

If approved, you have the option of taking your proceeds in one lump sum disbursement or monthly payments. The short- and long-term advantage of a reverse mortgage is that you never have to pay another mortgage payment again. You also don’t need to pay the loan back unless you leave the house or die.

Of course, like all loans, there are reverse mortgage pros and cons. The biggest pro is financial security in your golden years, while the biggest con might be leaving your children with a substantial loan that must be paid back after the homeowners die. However, if you do your own research, you can figure out if a reverse mortgage is right for you and your family.

Fast forward to 2022 and the hyperinflation and spiking real estate prices that are presently plaguing the U.S. economy. It poses a major question for financial analysts and advisors alike: will rising real estate prices also increase the proceeds you might receive with an approved reverse mortgage?

According to a new article, in 2022, a reverse mortgage remains a good way for seniors aged 62 and older to access much needed equity in their home. There are several factors that can affect the amount of cash you can borrow via a reverse mortgage including the interest rate you are offered, your age, and your home’s appraised value.      

It only stands to reason that the more your home is worth, the more you’ll be able to borrow on your reverse mortgage. So then, if your property value increases, can you get more cash from a reverse mortgage?

The simplest answer is yes. You can indeed get more money if you home is valued more. But this means refinancing your home and that comes with its own costs.

What Is Reverse Mortgage?

Defining Reverse Mortgages: Currently, you have your choice of three types of reverse mortgages. The home equity conversion mortgage or HECM, is said to be the most common reverse mortgage for homes $971,000 and below. These are insured by the Federal Housing Administration or FHA.

If your home should be worth more than $971,000, you can apply for a proprietary reverse mortgage, which is also referred to as a “jumbo reverse mortgage.” But keep in mind that if the value of your home rises in the current inflated market, you can increase the amount of proceeds you receive from your reverse mortgage. However, the costs of refinancing will be higher too.

Reverse Mortgage Explained: How Does It Work

Say the experts, it’s of paramount importance to gain an understanding of how much of a reverse mortgage you qualify for by using a reverse mortgage calculator. Your proceeds are dependent upon the payment plan you choose, your lender, and some other factors.

For instance, the amount you can borrow for an HECM is based on the “youngest borrower’s age,” plus the loan’s interest rate, and the home’s “lesser appraised value.” It can also depend on the FHA’s maximum proceed amount which in 2022 is about $971,000.  

You also need to have a clear understanding of your payment schedule. You can choose to take your proceeds in one lump sum or as equal monthly payments. It’s also possible to use the proceeds as a line of credit.

The equity that remains in your home depends on how long you have your reverse mortgage, plus the payment schedule you’ve chosen.

A Larger Reverse Mortgage Payout

Back to the basic question of whether or not an increase in the value of your home equates to a larger reverse mortgage payout. Again, if the value of your home increases, you will be able to receive a larger reverse mortgage payout. Full stop.

But due to the fact that your reverse mortgage is based on value of the home when you originally took out your mortgage, the reverse mortgage will act as a “new mortgage,” which means you will be refinancing. Refinancing can be extremely costly due to very high origination fees and other associated costs. What this comes down to, is you need to consider the overall costs of refinancing prior to entering into a new reverse mortgage. If you feel confused and unsure of your options, it’s best to consult with a HUD counselor before signing on the dotted line.

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