Reverse Mortgages: Decoding The Language of These Unique Loans

If you are retired or of retirement age, you are probably exploring ways to supplement your income. One way is by taking out a mortgage on your home, but a traditional mortgage may not do. 

The last thing you need is an additional bill to pay back when you are already struggling on a fixed retirement income. That is why reverse mortgages to help retirees were created, but some of the terminology used when explaining them can be confusing. Let's decode the language of these unique loans.

Photo by Tierra Mallorca on Unsplash

Defining the word “Reverse” as it Relates to Reverse Mortgages
A reverse mortgage is one that allows you to receive money on an ongoing basis from your lender. That is the reverse of a traditional loan. In a more traditional borrowing situation, you must make payments to your lender after the initial borrowing takes place. That difference can be helpful when you need to enjoy retirement without increasing your financial troubles.

Understanding What “Home Equity” Means for You
Home equity is essentially the value of your home. In the reverse mortgage world, there are several issues relating to home equity you need to understand. You need to know the total value of the home at the time, of course. It is also important to understand any of that equity that is currently spoken for. For example, if you already have a traditional mortgage, that affects your available equity. 

It is also important to know that you cannot even borrow the total currently available equity in your home. The government has regulations preventing that for your protection and the protection of your lender. 

A reverse mortgage calculator must be used to figure out exactly how much money is available. A reverse-mortgage calculating app is an online tool that calculates reverse mortgage rates based on government-imposed formulas and other factors. Your lender uses it to determine what you can borrow.

What “Home Equity Conversion Mortgage” Means
Another phrase you may hear a lot when seeking a reverse mortgage is “Home Equity Conversion Mortgage,” or “HECM.” An HECM is almost identical to a proprietary reverse mortgage

A reverse mortgage calculator is still used to determine what you can borrow. Also, you can receive the same general benefits from it. 

The difference is all reverse mortgages are government regulated somewhat, but only HECMs are government insured. They are typically offered through the Federal Department of Housing and Urban Development (HUD) or other government organizations, as opposed to local lenders.

What “Home Equity Line of Credit” Means
As mentioned above, home equity in the reverse mortgage world can refer to the total value of your home or to the amount available to borrow. 

The amount available to borrow is an amount you can borrow in one of several ways. A standard option is to request monthly installments to supplement your budget. However, you can also ask for other payment terms, such as a home equity line of credit. 

Much like a credit card, it provides you with a set amount you can borrow from only when you find yourself in need of a financial boost.

A “Loan Period” in the Reverse Mortgage World
If you have ever had any type of traditional loan, you know it must usually be repaid by a certain date. The length of time between the initial borrowing date and the repayment date is the loan period. 

A loan period does not exist in the traditional sense when you apply for a reverse mortgage. As long as you use the home as your main residence, you can keep the loan agreement active. However, the loan comes due when you vacate the home. Therefore, the loan period is however long it takes you to either move out or pay the balance.

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