To put simply, a reverse mortgage is a loan against the equity of a home. In a traditional mortgage, a borrower’s income is used to pay back a home loan, and
build up equity in a home. A reverse mortgage does exactly the opposite; it allows a homeowner to use the equity built up in their home as a cash loan: a source of income.
Reverse mortgages are only available for seniors over the age of 62, who own a house, (or have a mortgage that can be paid off with the funds from the reverse mortgage) and use that house as their primary residence. In some cases, other dwellings such as mobile homes or condominiums may qualify, but they must be approved by the Federal Housing Administration.
A reverse mortgage differs from a home equity loan in that a borrower does not need to have a source of income. Payments never need to be made on the reverse mortgage; the loan is paid back in full when the house is sold, no longer used as a primary residence, or when the borrower(s) pass away. The amount that may be borrowed through a
reverse mortgage mainly depends on three factors: the age of the borrower, the appraised value of the home, and the current interest rate. The higher the age and value of the home, and the lower the interest rate, the larger the loan may be. There may also be limits on the amount borrowed, but these vary by county, and should be researched if interested in a reverse mortgage. Cash from a reverse mortgage can be received in several ways: as a lump sum, monthly payments, or as a line of credit.
The risk of default on a reverse mortgage is very low, because the amount loaned will never be more than the value of the home. The cash borrowed plus interest and fees must be repaid when a borrower sells the home or changes primary residence. Even if the owner dies, the heirs to the home will be able to repay the reverse mortgage with the proceeds from the sale of the property. Even if the property value has declined, the heirs will never owe more than the value of the home.
Though it may sound like a great way to borrow money at first, there are also many
disadvantages to a reverse mortgage. In fact, the U.S. Department of Housing and Urban Development (HUD) requires that candidates for reverse mortgages meet with an approved counseling authority to clarify that the terms of the loan are fully understood, and to assure that a reverse mortgage is the right option to take.
Reverse mortgages are typically not the cheapest way to borrow money. The longer a borrower stays in the home, or the longer they live will continue to compound the interest on the loan and it may end up being very expensive. Some seniors think that a reverse mortgage is a good idea because it allows them to remain in their homes, but they are often encouraged to consider selling their homes outright and moving to less costly housing. This option can be much more efficient in the long term, depending on the individual needs of the borrower. Reverse mortgages are best reserved for financial emergencies, health care costs, or other increased expenses in one’s later years. Things such as home repairs or travel expenses can often be financed through
home equity loans for much less money.
There are many options for seniors who need to cover large expenses, and a reverse mortgage may or may not be the best option. Depending on the individual situation, selling your home and moving into less costly housing, or home equity loans may be much less expensive ways to borrow. To help with weighing out your options, several reverse mortgage calculators are available online that can estimate the amount you may be able to borrow. If you are seriously considering a reverse mortgage, set up a meeting with a HUD approved counselor or
reverse mortgage lender for more information.