What is a Reverse Mortgage and How Does it Work?
This is not a question that is often asked regarding Chicago mortgage matters, as it concerns a reversal of the usual mortgage process. A reverse mortgage is a Chicago loan that targets seniors or individuals 62 or older. Its purpose is to release in multiple payments or in one payment, the home equity in the property to the loan recipient.
To understand what a reverse mortgage is, one has to recall that a conventional Chicago mortgage obliges the homeowner to pay a monthly amount to the lending institution. Each time the homeowner pays, the equity in his home increases. After all his payments are made, the lending institution releases the house and the property becomes the homeowner’s.
That is the process of a conventional Chicago mortgage. So, when dealing with a reverse mortgage, the process is actually reversed. A reverse mortgage sees the Chicago homeowner making no monthly amortization payments on their loan. In fact, they are the ones who receives monthly payments (if the loan is not released to him in lump sum).
In a reverse mortgage, the homeowner’s obligation to pay is deferred until they die or, when they vacate or sells the house. All the interest is just added on the lien on the property (something very different from a traditional Chicago mortgage).
If you already know what a reverse mortgage is, then you know that under this loan your obligation to pay arises only when you stop living in the home or when you die.
Some benefits of a reverse mortgage are the following:
- No income restrictions;
- Tax free;
- Payments do not affect other benefits (SSS/Medicare);
- Financial security.
To qualify for a reverse mortgage in Chicago – one has to be 62 years-old or older; the house must be their own property that is free of any encumbrances, except for a small amount owed to an existing Chicago mortgage. Which can be paid right away from the amount to be received from the reverse mortgage.
If you are concerned about what a reverse mortgage is and what happens when you, as the homeowner, dies – the answer is simple: Your home will be sold and the proceeds used to pay off the loan. The house cannot be inherited by an heir.
Another name for a reverse mortgage is the HECM or the Home Equity Conversion Mortgage. The Federal government sets the eligibility for a reverse mortgage, and gives the HECM lenders guidance regarding the age of borrowers to be allowed and the amount to be lent after considering the value of the home.
As the HECM reverse mortgage home purchase program is relatively new, the interested homeowner should first consult with specialists in their area as the program does not apply to all states and may vary in each.