Reverse mortgages can be set up in many different ways. The homeowner can choose an immediate cash advance, a monthly advance, a line of credit or a combination of all three.
Depending on the lender, a homeowner can choose which option to take based on his or her need. With some lenders an immediate cash advance will provide the highest total loan. However, other lenders will give more if the money is taken over a longer period of time. That period of time is up to the homeowner. Unlike home equity lines of credit, reverse mortgages are open until for the life of the homeowner dies.
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A reverse mortgage gets its name from the way it operates. In a regular loan or mortgage, the homeowner makes payments to the lender, but in the reverse mortgage payments are made by the lender to the borrow. This is possible because, unlike a regular loan where income is used to create equity, a reverse mortgage uses the value of your home to create income. In this case, equity is like a nest egg that the home owner has saved. Through a reverse mortgage, the homeowner is able to tap into and use this nest egg without having to sell his or her home.
The benefits of a reverse mortgage are many:
- No monthly payments for the life of the owner, no matter how long the time
period may be even if the value of the house decreases, unless he or she decides
to sell, at which point the loan may be repaid through the selling price or
through other funds as the borrower chooses.
- A reverse mortgage credit line provides a guaranteed monthly income which
has the potential to increase as the length of the borrowing period increases.
- The homeowner has a reserve in case of unexpected or irregular expenses.
- A guaranteed monthly income provides freedom and independence.
- Money from a reverse mortgage is not considered income and will not need
to be counted as such on the borrower’s taxes. Also, it will not interfere
with Social Security and Medicare.