A reverse mortgage allows people over the age of 62 to convert the equity they've built in their homes into cash. The lender issues the loan, then only collects payment when the homeowner passes away, sells the residence, or loses the home in some other way.
Do Homeowners Make Payments on a Reverse Mortgage?
A second mortgage or home equity line of credit requires the borrower to make monthly payments toward the principle and interest of the loan, but a reverse mortgage does not. Borrowers do not pay back the loan; instead, the lender recoups the money from the eventual sale of the property.
What if the Value of the Home Exceeds the Loan Amount?
After the homeowner passes away or sells the property, the lender collects the amount of the loan plus interest and fees. If the sale price exceeds the debt owed, the remaining cash passes to the homeowner, the estate, or the named heirs, according to HUD.
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How Much Home Equity Can a Homeowner Borrow?
The amount a bank or financial institution lends depends on their specific policy, but most lenders offer reverse mortgages of up to 50 percent of the property's value. An older homeowner can tap more of his or her home equity than a younger borrower.
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