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How does a reverse mortgage work?

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asked Aug 25, 2015 in Real Estate by anonymous
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A reverse mortgage is for people who are at least 62 years old, own a home and have enough equity in the home so that they can borrow against it and get a line of credit or a fixed monthly payment. They won't have to repay the mortgage until they move out, sell the house or pass away. It basically means that the lender is now going to start paying them. Either a monthly amount or a lump sum. They will never have to owe more then the loan of the house. They will keep the title and their debt will increase while your equity decreases. 

[1] http://www.reversemortgage.org/gethelp/mostfrequentlyaskedquestions.aspx

[2] http://www.investopedia.com/articles/personal-finance/103014/how-does-reverse-mortgage-work.asp

answered Aug 26, 2015 by julieprovost (4,500 points)
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A reverse mortgage, also known as a home equity conversion mortgage (HECM), is a federally insured loan that is given to homeowners over the age of 62 that allows them to withdraw some of the equity in their home. [1]

 

In essence, the mortgage company that provides the loan allows the homeowner to borrow money against the value of the home. This money does not have to be paid back until the house is sold or until the homeowner dies.

 

The money can be given in one of three ways:

 

  • A lump sum payment
  • An equity line of credit that homeowner can draw on whenever they need it
  • A recurring monthly payment

 

There are a number of reasons why homeowners decide to take out a reverse mortgage. Some people use the money to supplement their Social Security income so that they can live a more comfortable lifestyle. Others use it to cover unexpected expenses such as large medical bills. Still others use the money for home improvement projects or renovations. How the money is used is left entirely up to the discretion of the homeowner.

 

The lender makes their money through interest. A portion of the value of the home is set aside as interest when the loan is originated. This interest is not payable until the home is sold or the homeowner dies.

 

In summary:

 

  • Reverse mortgages are loans for people age 62 and older that are borrowed against the equity in a home.
  • The loans don't have to be repaid until the home is sold or the homeowner passes away.
  • The money can be paid out as a lump sum, as monthly payments or as an equity line of credit.
  • There are no restrictions on how the money can be used.
  • The mortgage company makes their money when the home sells and they recoup their interest.
  • When the home is sold, any money above and beyond that which is due to the lender goes to the homeowner or their heirs. [2]

 

The following video looks at some of the pros and cons of reverse mortgages:

 

 

Additionally, this infographic breaks down some of they key points about HECM loans, including dangers that you need to watch out for:

 

 

References:

1. http://www.investopedia.com/articles/personal-finance/103014/how-does-reverse-mortgage-work.asp

2. http://www.seniorcitizensguide.com/articles/connecticut/reversemortgage.htm

Infographic source: http://www.bills.com/what-is-a-reverse-mortgage/

answered Aug 26, 2015 by blueskies (57,070 points)

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