Home All Posts Interpreting the Language Associated with Reverse Mortgages

Interpreting the Language Associated with Reverse Mortgages

by Author: Jade Lloyd

Retirement is meant to be an enjoyable time, but it can add stress to your life, if you are not financially prepared for it. One way to potentially relieve some of that stress is by taking out a reverse mortgage on your home. To understand how a reverse mortgage may help you when a traditional mortgage may not, you must know how to interpret the language associated with reverse mortgages. Here are some of the main reverse mortgage definitions and concepts you need to know.

Reverse Mortgage Versus Traditional Mortgage Versus HECM

The first thing you need to understand is what the term “reverse mortgage” actually means. It is simply a home loan that can provide you with money each month, rather than one requiring you to pay money back monthly. A traditional mortgage is a short-term loan good for a set number of years and requiring regular partial repayment. A reverse mortgage is a long-term agreement allowing you to borrow money from your home equity for as long as you choose to reside there.

When looking up reverse mortgages, one term you are likely to hear is “home equity conversion mortgage. It is also referred to by the acronym “HECM.” For the most part, it is simply a reverse loan issued by a government agency instead of private big banks that accept reverse mortgage applications. The major difference between an HECM and a reverse mortgage obtained through a non-government reverse mortgage lender is an HECM is government-insured.

What a Reverse Mortgage Calculator Is

Another term you will hear a lot when researching reverse mortgages is “reverse mortgage calculator.” It is a tool designed to help you establish how much money you can borrow. The purpose of the reverse mortgage calculator is to take the many factors involved in reverse loan establishment into account. For example, federal regulations prohibit you from borrowing the entire value of your home as cash. The calculator tool can compute exactly what your home is worth and how much of that value you can legally convert.

Home Equity and Factors That Affect It

Home equity at its simplest is the value of your home. Before you can use a reverse mortgage calculator to figure out what you can borrow, the total value must be established. Establishing that value can be difficult because it is not necessarily what you paid for the property. Factors like improvements you have made, the age of the home and the neighborhood it is in can all affect the value. If you already have a current mortgage on the home, its current available equity is also reduced.

Establishing a Line of Credit with a Reverse Mortgage

If you hear the term “line of credit” when applying for a reverse mortgage, you may think of a credit card. The concept is almost exactly the same. A line of credit involves determining the total amount you can borrow. Then your reverse mortgage lender can allow you to borrow up to that total in the amounts and at the times you desire.

Establishment of a line of credit is only one way to set up a reverse mortgage. There are other options, such as requesting one large payment. A lump sum payment is often useful for covering the cost of a major unexpected expense, such as a prolonged hospital stay. You can also opt to receive monthly installment payments for as long as funds last. Doing so can help you during retirement because it will be similar to receiving a regular paycheck when you were working. It is a reliable set amount you can use to pay established expenses. However, you must keep careful track of when those payments will stop so you are not caught off guard.

Note: This is a collaborative post.

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