A reverse mortgage is an interesting sort of financial product. Maybe you’re vaguely familiar with the concept. Let’s take a closer look at how it works specifically. The way a reverse mortgage works is simple – it allows senior citizens (at least 62 years old) to tap into the accumulated equity of their home without having to move out of the property.
With a reverse mortgage, the buyer, which might be a bank, agrees to pay the home owner a certain amount of money for the right to take possession of the property when the owner dies. Payments may be made by monthly check, a lump sum, or line of credit. Regardless of the method, the goal is to allow seniors to maintain a quality standard of living without having to leave their home.
The concept of the reverse mortgage has been around at least since the Middle Ages, though it arrived in America as a fledging private market product only during the 1970s. By the late 1980s, the government was involved and Congress designated the Federal Housing Association to insure the industry. There has been a dramatic increase in reverse mortgages in recent years, driven by the aging Baby Boomer population.
A reverse mortgage insured by the FHA currently has a loan limit of $417,000, with higher amounts designated for Alaska and Hawaii. The FHA has a formula they use to determine how much money you get. For example, a 75 year old will receive roughly 65% of the value of their home up to the limit of $417,000.
As an income property investor, the reverse mortgage may not be something you’re interested in right now but you should at least have a working knowledge of the idea. Our work here is done for now.
