Considerable discussion has taken place over the past several years about reverse mortgages, and how they work. The reverse mortgage is a type of home equity loan that allows an owner to convert some of the equity of a home into cash while retaining home ownership. It works like a traditional mortgage, only in reverse. Rather than paying a lender a fixed amount each month, the lender pays the home owner.
Reverse mortgages are ideal for a homeowner who is 62 years of age or older, and who is “house rich but cash poor.” The reverse mortgage can increase monthly income, but should be carefully considered only after consulting with an attorney or a financial advisor.
To qualify for a reverse mortgage, the borrower must own his or her home. Unlike conventional home equity loans, they do not require any repayment of principal, interest or servicing fees, as long as the owner lives in the home. The funds from reverse mortgages may be used for any purpose, including meeting housing expenses, such as taxes, insurance or maintenance costs.
Reverse mortgage funds may be paid in a lump sum, in monthly advances, through a line of credit or any combination of the three. The amount a borrower can receive is based on age, the equity in the home and the interest rate the lender is charging.
Because the homeowner retains title to the home, the owner is responsible for taxes, repairs and maintenance. Depending upon the arrangements established with the lender, the reverse mortgage will become due with interest when the home owner permanently moves, sells the home, dies or reaches the end of a pre-selected loan term.
The lender does not take title to the home upon the owner’s death, but heirs must pay off the loan. The debt is usually repaid by refinancing the loan into a new mortgage, or by using the proceeds from the sale of the home.
