Unlike a traditional mortgage, the homeowner does not make payments to the lender. For reverse mortgages, the lender makes payments to the homeowner. The homeowner is able to choose how they wish to receive these payments (either via a lump sum payment, regular monthly installments, or via a line of credit). The borrower only pays interest on the proceeds received. Any interest amounts are rolled into the loan balance so the borrower does not need to pay anything up front prior to receiving the funds. The homeowner also keeps the title to the home. Throughout the life of the loan, the homeowners debt increases and their home equity decreases.
Like a traditional mortgage, a reverse mortgage too uses the home as the collateral for the loan. Should the homeowner move or die, the home will be sold and the proceeds will go to the lender to repay the reverse mortgages interest, principal, any mortgage insurance, and any associated fees. All sale proceeds above and beyond what was borrowed will go to the homeowner provided they are still alive, or to the homeowners estate in the event that homeowner has passed away. In some cases, the owners of the estate may be able to instead pay off the mortgage in order to keep the home without selling it.
Another added benefit is that the reverse mortgage proceeds are not taxable. Even though the proceeds may seem like income to the homeowner or borrower, luckily the IRS considers this money to be a loan advance.
If you are confused, you are not alone. Please give Southern California Trusted Realty Associates a call today and we can help explain more details over the phone.
We would love to speak with you so please don't hesitate to reach out if you have any questions or comments.