A reverse mortgage is one of many vehicles that individuals 62 years of age or older can use to turn the equity in their home into cash. It is very important, though, for an individual to fully understand reverse mortgages, their ramifications, and the alternatives. This article will provide an overview of reverse mortgages, as well as discuss alternatives.
What is a Reverse Mortgage?
With a “normal” home loan you pay a monthly amount (principal and interest). With each month, the amount that you owe goes down and the equity in your home goes up. As one might expect from its name, a reverse mortgage works in an opposite fashion. With a reverse mortgage you can turn the equity in your home into cash. You do not have to make monthly payments. The cash may be paid to you in one or more of the following ways:
- As a single lump sum payment
- As a regular monthly amount (a cash advance)
- As a credit line account that you draw upon as needed
With a reverse mortgage, the homeowner continues to own their home and receives cash in whatever way is preferable to them. As they receive cash, their loan amount goes up, and the equity in their home declines. A reverse mortgage cannot grow to more than the amount of the equity of the house. In addition, a lender cannot seek payment of the loan from anything other than the value of the house. Your other assets and the assets of your heirs are protected by what is called a “non-recourse limit.”
A reverse mortgage, plus accrued interest, does eventually have to get paid back. Repayment of a reverse mortgage happens when the last owner of the property named on the loan either dies, sells the home, or permanently moves out of the home. Before then, nothing needs to be paid on the loan.
There are other circumstances in which reverse mortgage lenders can also require repayment of a loan prior to the above conditions. These include:
- The borrower fails to pay their property taxes
- The borrower fails to maintain and repair their home
- The borrower fails to keep their home insured
There are also other default conditions that can cause repayment of the loan. Most of these are similar to default conditions for traditional mortgages (for example, declaration of bankruptcy, donation or abandonment of the home, perpetration of fraud or misrepresentation, and more).
A reverse mortgage should not be confused with a home equity loan or home equity line, both of which are other means of obtaining money for the equity in your home. With either of these loan vehicles, an individual must pay at least…