Reverse Mortgage: What Is It and How Does It Work?

By Accel Mortgage
July 20, 2022

In difficult economic times, many people look for alternative sources of funding to help them meet their financial obligations. While a traditional loan is one option, a reverse mortgage can work better for senior homeowners. So, if you're at least 62, a reverse mortgage may be a great option for you to consider.

What Is a Reverse Mortgage?

A reverse mortgage is a loan that relies on the homeowner having substantial equity in their home. This option is available only to seniors who own their own homes because it will usually take several decades to build enough equity to qualify. When you do qualify, you have several options for receiving the funds.

Your choices for a reverse mortgage include:

  • A single lump sum
  • A fixed monthly payment
  • An open line of credit

Unlike a traditional mortgage, you won't have to make monthly payments to repay the loan. Instead, the loan is repaid upon the sale of the property, and the terms of the loan are set to ensure the amount owed won't exceed the home's value.

If economic factors change the home's value, the borrower or their estate won't be liable for the difference.

How Does Reverse Mortgage Work?

Once you understand this process, you should know more about the specifics of a reverse mortgage. For example, how does reverse mortgage work? This type of loan earns its name due to the payments received by the borrower from the lender.

The borrower owes interest on the loan. However, instead of the borrower making upfront interest payments, the interest charges increase the loan balance. When you or your loved ones sell the house, the loan and interest get deducted from the home sale.

As the borrower receives more payments, their debt will reduce the equity they have in their home.

A reverse mortgage doesn't necessarily mean your spouse or children will lose the house at the time of your death. If your loved ones want to keep the home, they will have the option of taking out a traditional home loan to pay off the reverse mortgage. In that scenario, your family can keep the home.

What Are the Benefits of a Reverse Mortgage?

People often think of a home equity loan or a home equity line of credit when asking, "How does reverse mortgage work?" While these borrowing options are similar, a reverse mortgage doesn't require proof of your income. You also don't have to maintain good credit to qualify.

The reverse mortgage sidesteps these requirements for seniors who need to access their home's equity without selling their primary residence. In addition, since the borrower doesn't have to make monthly payments, this is ideal for seniors who live on fixed incomes.

Contact Us for Our Rates

Contact us today to learn more about reverse mortgages and to inquire about our rates. One of our loan officers can help you determine whether a reverse mortgage is right for you.

Your First Step Starts Here

Whether you’re a first-time homebuyer, are interested in refinancing, or are over 62 and looking to do a reverse mortgage, we’re a Pasadena mortgage broker that can help you reach your goal.