There are many articles available online, extolling the virtues of a reverse home loan, but what many of these articles don’t do, is explain the purpose of reverse home loans and what the actual ins and outs are. 

An established history

Reverse mortgages have been around for approximately 60 years and have undergone several changes to their format as time has progressed. Certain government regulations have been added, and tweaks and refinements have taken place to make the product viable for the age in which we live, but essentially its function, to help those who need a financial boost during retirement, remains the same.

How the process works

As the idea of a reverse home loan grew in popularity, the US government started working on developing its own version of this kind of loan. Known as a Home Equity Conversion Mortgage, it is issued and insured by the federal government, particularly the Department of Housing and Urban Development (HUD). A reverse mortgage that is issued by a private lender is still subject to all applicable laws and regulations but is not backed or insured by the government.

What makes a reverse mortgage, reverse?

It its basic form, a reverse mortgage pays you an amount of money from your lender according to the lending terms agreed upon by both parties. Compared to a regular loan, where you are subject to making monthly payments to your lender instead of receiving them, the meaning behind the name becomes clear. Your lender will make use of a reverse-mortgage calculator to determine the amount that you will be able to borrow, based on your overall financial standing and the general condition, age, and location of your house.

The reason for a reverse home loan not requiring any regular payments to be made is that it is designed to be a very long-term loan, spanning many years to provide assistance in the form of capital to the borrower throughout their retirement. The terms are simple too – as long as you stay in the house permanently, and remain its legal owner, you will not be expected to pay back the loan by a certain time.

Are there any restrictions on how the money can be spent?

In general, there are no significant restrictions on how you spend the money on your reverse home loan. Whether you want to fund a major holiday, take care of personal or family issues, or renovate your house, you are free to use the money as you see fit. Even living expenses are within reason!

The main obstacle you should be aware of is this: if you are still bound by another mortgage at the time when you apply for a reverse mortgage, the initial mortgage will have to be settled in full before you can access any of the money in your loan. However, it is common practice to settle the outstanding balance using funds from the reverse mortgage to complete this transaction. You will just need to understand that this will affect the amount you are left with after all fees and balances have been settled.