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How a reverse mortgage works

How a reverse mortgage works

October 7, 2016
reverse mortgage
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Have you ever heard of a reverse mortgage? It’s an interesting financial product that allows people who are at least 62 years old to borrow against the equity in their home. However, unlike normal mortgages, with reverse mortgages no payment is required until you either permanently move out of your home, sell the home, or pass away.

How a reverse mortgage works

With a regular mortgage, you borrow money from a lender, make monthly payments and build equity in your home. As time passes, your debt decreases and your home equity increases. When the mortgage is paid in full, you have full equity and own the home outright.

A reverse mortgage, however, is almost the exact opposite. Instead of you making monthly payments, the lender pays you based on a percentage of the value in your home. You can choose to either get the entire sum upfront, as a regular monthly cash advance, a line of credit or a combination of these methods. You are charged interest only on the proceeds that you receive. The interest rates can be either fixed or variable.

You still keep the title to your home throughout the life of the reverse mortgage. It acts as security for your loan.

Your debt increases as the loan progresses. Unfortunately, your home equity decreases. You must repay the loan in full if you want to sell your home or plan to permanently move away. In case you pass away, the lender will sell the house to recover the money that you received.

After lender fees are paid, any equity left in the home goes to you or your heirs. However, even if you receive more payments than your home is worth, you will never owe more than the value of the property. Additionally, any debt from the reverse mortgage cannot pass to your heirs.

Important

If the borrower fails to meet certain obligations, the reverse mortgage becomes due. These obligations include paying taxes and insurance, or making sure that the property doesn’t fall into disrepair.

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