Reverse Mortgages 101- When To Use One

In America they are called reverse mortgages, in the UK they are called lifetime mortgages, and while the names may be different, what they are and how they are structured are basically the same. 

In essence a reverse mortgage is a equity release scheme allowing the homeowner to gain access to the equity in their property and use this equity as a monthly income to live on, or it can be taken in one lump sum. 

The majority of property owners that would make use of a reverse mortgage would be older, senior citizen/OAP, possibly already retired, and naturally having substantial equity in their homes. 

Basically an example would be this: 

A homeowner who meets the minimum age requirement, usually in their 50’s, and has an outstanding mortgage on their home with a small balance, or may own their home outright, wants to gain access to the equity or value they have in their property without having to sell the property and find new accommodations. 

They may want to access the equity they have either as a lump sum, or in the form of an income, receiving payments each month to supplement what income they may have, or as their sole source of income. 

They would make an application for the reverse mortgage with a mortgage lender or broker and this person would then qualify them for the loan based on a few factors. 

These factors would be the amount of equity they may have in their property, their age, interest rates that are available at the time, etc. 

The mortgage lender is only going to lend a certain percentage of the equity or value of the property. The older the person is who applies for the reverse mortgage, the higher the percentage may be that is allowed to be lent. This is due to the fact that with a reverse mortgage there are no payments to the mortgage lender, they are making payments to the borrower out of the equity in the home. The older a person is who is looking to do this type of loan, the less years they have to live, so they can receive a higher monthly payment. It is a sad fact of life, and also how payments can be determined. 

The person applying for the mortgage once approved will begin to receive the set monthly payments and are allowed to continue to live in their homes. Upon their death, the mortgage company will then take back the property and sell it to recover their costs, expenses and pay back the mortgage. 

Who are reverse mortgage for and when should they be used? 

Obviously the person will be older with sufficient equity in their home, and they may be in need of the additional cash each month to live off of. 

It also will be someone who is not looking to leaving their property to a family member upon their death. 

I have a close friend who has no children, he is single and owns his property outright. he has a few more working years left and then when he retires we have discussed him looking into a reverse mortgage as a way to gain some extra money each month so he can continue to live the lifestyle he currently has. For him the reverse mortgage is ideal. 

So just an overview of what reverse mortgages are and some ideas of who and when to make use of one. 

Author Bio: 
The author Jon Emge is the Web Content Manager and Senior Advisor for My Money LTD and also writes articles and blogs for www.lifequoes4u.co.uk. 

He has over 25 years experience in the field of personal finance in both the USA and UK, of which 17 years has been providing debt and bankruptcy advice.