How Does A Reverse Mortgage Work?

How reverse mortgages work is as simple or as difficult as understanding how a normal mortgage works.  A mortgage embodies an agreement between a lender and a borrower where the borrower transfers his interest in the subject matter (mortgage property) usually land, to the lender with a promise that it will be retransferred when he/she has repaid the date. 

These repayments may be regular or irregular depending on the agreement arrived at by the parties.

Reverse Mortgage For Dummy

A reverse mortgage works under the same concept, the only difference is that it reverses the obligations of the parties.  Instead of the mortgagor paying the mortgagee any money advanced, the mortgagee will pay the mortgagor this amount using either of the following methods:

• He/she can pay in one lump sum of cash
  
  
• The second option is to repay in regular monthly installments.  This can be for a specific period as per the terms of the loan or for as long as the mortgagor lives in the house. Payment can also be done by using the loan to buy an annuity for the rest of ones life.
  
  
• Thirdly, he or she can also release it in the form of instructed credit where the mortgagor will choose on when and how much they want from the mortgagee.
  
  
• Lastly, the mortgagor may decide on whether a combined formula any or all the above will be appropriate for them.

Maintenance of a balance and home owner’s equity

However, it should be noted that this balance can only be maintained if the mortgagor continues to live in the mortgaged property and that they do not sell it.

The shine behind this idea is the concept of Home Equity.  This is the value of a homeowners unattached interest his or her property, that is, the difference between the market value and it’s unpaid mortgage. Home equity will increase with appreciation of the property and also with payment of the loan.

For reverse mortgages, home equity will usually decrease with every payment made to the mortgagor It should be noted this equity is not liquid and has a nil rate of return.

The elements of securitization in these transactions will almost without a doubt pose the question, how reverse mortgages work.  The mortgagee can only recover the loan from the property mortgaged. 

Unlike a conventional mortgage, reverse mortgages cannot float.  Any depreciation in the value of property cannot be shifted to the mortgagor.

Consideration for lending by mortgagee

In the United States, the amount of loan to be advanced to an intending mortgagor will be based on the following:

• The age of the Borrower is the most important factor to be considered. One must prove that they have attained the age of 62 in order for them to qualify for this loan.
  
  
• The monetary value of the property both at present and in future.
  
  
• The specific mode or scheme chosen by the mortgagor
  
  
• The current and anticipated interest rates

In whole, the working of a reverse mortgage will depend on provisions of Statute and commercial practice.  It is advisable for an intending borrower to get the necessary information from a HUD approved counseling agency before they venture.

References

• http://www.wikipedia.com
• http://www.aarp.org/money
• http://www.streetdirectory.com/homeloans