Should You Pay Off Old Debt Or New Debt First What’s a Reverse Mortgage and How do they Work?

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What’s a Reverse Mortgage and How do they Work?

If you have a home that’s paid off – or nearly paid off – a reverse mortgage can help you live better by providing a steady stream of reliable income.

This type of mortgage is called a reverse mortgage because instead of you paying the lender a set amount per month for a set number of years, the lender pays you. These payments are cash advances against the value of your home.

There are different types of reverse mortgages, but they are all similar in some ways. You continue to own your home just as you would with a conventional mortgage. You pay property taxes and are responsible for maintenance, homeowner’s insurance and property repairs.

At the end of the mortgage term, you or your heirs must repay all cash advances plus interest. If you or your heirs can’t do this, the lender can foreclose on your home.

There are financing fees associated with reverse mortgages just like there are with forward mortgages. The money from the reverse mortgage can be used to pay these fees. These costs are added to your loan balance and must be paid back with interest when the loan is due.

How much money can you get with a reverse mortgage?

The monthly amount you receive will depend on your age and the value of your home. Here is an example. One reverse mortgage currently available is the federally insured home equity conversion mortgage, or HECM. Assuming you own a home worth $200,000 and owe nothing on it, a HECM could pay you $641 a month for the rest of your life. Alternatively, you can get a $107,466 line of credit account that you can then draw from whenever you want. Or you can choose a lump sum payment for the same $107,466.

Keep in mind that a reverse mortgage is usually a first mortgage. In this case, if you still owe money on your home, you must pay off the old mortgage first. If you don’t have the money to do this, you can usually use the money from the reverse mortgage to pay off the old debt.

How much will you or your heirs end up owing?

The amount owed will be equal to all the cash advances you received plus all the interest that is added to your loan balance. If that amount is less than what your home is worth, you or your heirs will get the difference. Another good news is that you can never borrow more than what your home is worth at the time the loan is paid off.

If you’re “house rich” but “house poor,” a reverse mortgage can help make your golden years even more golden. However, make sure you read the loan documents carefully to make sure you understand all the terms and conditions of the loan.

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