Understanding the basics
What is a reverse mortgage?
There is no shortage of information online, and not all of it is accurate. Here is a clear, plain language look at how these loans actually work, so you can decide from a place of understanding.
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A tool for turning equity into flexibility
A reverse mortgage is a loan available to many homeowners age 62 and older that lets them convert a portion of their home's equity into usable funds while they continue to live in the home. Unlike a traditional mortgage, eligible borrowers are generally not required to make monthly mortgage payments toward the balance, as long as they keep meeting the loan's requirements.
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First, what is home equity?
Home equity is simply the difference between what your home is worth and what you still owe on any existing mortgage. Over time, many homeowners build substantial equity through their payments and through appreciation in value.
A reverse mortgage lets qualified homeowners access a portion of that equity without selling the home.
Figures are illustrative. Your available amount depends on age, home value, and current lending guidelines.
The difference
How it differs from a traditional mortgage
With a traditional mortgage, you borrow to buy a home and make monthly payments to repay the loan over time. A reverse mortgage works in the other direction. Interest and applicable fees are added to the balance over time, and the loan is typically repaid when the borrower sells, permanently moves out, or passes away.
That does not mean there are no responsibilities. Borrowers are still expected to keep up their end.
As a borrower, you agree to keep:
- Living in the home as your primary residence
- Keeping the property in good condition
- Staying current on property taxes
- Maintaining homeowners insurance
- Paying any applicable homeowners association dues
Your options
How the money can be received
Depending on the program and your goals, loan proceeds may be made available in several ways.
Lump sum
A single payment at closing, often used to pay off an existing mortgage or address a significant need.
Monthly payments
Funds distributed in regular monthly installments to add income throughout retirement.
Line of credit
Access available funds as you need them, rather than receiving everything at once.
Combination
Depending on the program, it may be possible to combine methods to fit your situation.
Will I still own my home?
In most cases, yes. You continue to own your home and your name remains on the title. Like any mortgage, the lender places a lien against the property until the loan is repaid, but ownership stays with you.
Is counseling required?
For many government insured programs, yes. An independent HUD approved counselor, who does not work for the lender, helps confirm you understand the costs, your responsibilities, and possible alternatives before you proceed.
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See whether it fits your situation
Understanding how the program works is the first step. The next is looking honestly at whether it is a good fit for your goals.