What Is a Reverse Mortgage?
In a word, a reverse mortgage is a loan. A homeowner who is 62 or older and has
considerable home equity can borrow against the value of their home and receive
funds as a lump sum, fixed monthly payment or line of credit. Unlike a forward
mortgage—the type used to buy a home—a reverse mortgage doesn’t require the
homeowner to make any loan payments.
Instead, the entire loan balance becomes due and payable when the borrower dies,
moves away permanently or sells the home. Federal regulations require lenders to
structure the transaction so the loan amount doesn’t exceed the home’s value and
the borrower or borrower’s estate won’t be held responsible for paying the
difference if the loan balance does become larger than the home’s value. One way
this could happen is through a drop in the home’s market value; another is if the
borrower lives a long time.1
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How Does A Reverse Mortgage Work?
The Cash in Equity
Reverse mortgages can provide much-needed cash for seniors whose net worth is
mostly tied up in the value of their home. On the other hand, these loans can be
costly and complex, as well as subject to scams. This article will teach you how
reverse mortgages work, and how to protect yourself from the pitfalls, so you can
make an informed decision about whether such a loan might be right for you or your
parents.
According to the National Reverse Mortgage Lenders Association, homeowners aged 62
and older held $7.14 trillion in home equity in the first quarter of 2019. The
number marks an all-time high since measurement began in 2000, underscoring how
large a source of wealth home equity is for retirement-age adults.2 Home equity is
only usable wealth if you sell and downsize or borrow against that equity. And
that’s where reverse mortgages come into play, especially for retirees with limited
incomes and few other assets.
KEY TAKEAWAYS
A reverse mortgage is a type of loan for seniors ages 62 and older.
Reverse mortgage loans allow homeowners to convert their home equity into cash
income with no monthly mortgage payments.
Most reverse mortgages are federally insured, but beware a spate of reverse
mortgage scams that target seniors.
Reverse mortgages can be a great financial decision for some, but a poor decision
for others. Be sure to understand how reverse mortgages work and what they mean for
you and your family before deciding.
