House miniature and a keyIn recent years, TV ads selling reverse mortgage programs have become a staple in your favorite channel’s daily schedule. These commercials have allowed for this type of loan to be introduced to audiences from all walks of life.

Unfortunately, according to a study conducted by the Consumer Financial Protection Bureau, these ads also contributed to consumer confusion in terms of how reverse mortgages work.

If you, too, share this confusion, here is a primer on this highly specific type of loan, which, hopefully, could guide your future financial decisions.

What is a reverse mortgage?

A reverse mortgage is a type of loan available to homeowners who are at least 62 years of age. Its main difference from conventional mortgages is the fact that this program does not require borrowers to make monthly payments. This is where it gets slightly confounding.

You may ask, what kind of financial product allows me to receive a loan and not be expected to pay the mortgage? The answer is simple: home equity. With reverse mortgages, you use your accumulated home equity as loan collateral.

Just like with other types of loans, you are responsible to pay back your borrowed amount in due time. This payment happens once a borrower passes away or decides to sell their home.

Types of Reverse Mortgages

Reverse mortgages come in three general variants. There are those offered by some non-profits or state and municipal government agencies, called single-purpose reverse mortgages. There are those insured by the federal government, called Home Equity Conversion Mortgages (HECM).

And, lastly, there are those issued privately, called proprietary reverse mortgages. Regardless of mortgage type, reverse mortgage applicants undergo the same financial assessment wherein they are gauged in terms of their ability to pay property taxes, basic home maintenance, homeowner’s insurance, and, if applicable, home owner’s association fees.

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Reverse mortgages exist to help elderly homeowners struggling financially. Rest assured these programs are in utmost fairness. When it comes to that, there ought to be no confusion.