What is a reverse mortgage?
A reverse mortgage is a loan for people aged 62 and up in which the lender pays homeowners in advance on the equity of their homes. The loan usually only needs to be paid back after the homeowner dies or moves out, making it a convenient source of income.
Traditional mortgages require homeowners to make scheduled monthly payments. In a reverse mortgage, lenders make payments to the homeowner instead. They allow senior citizens to access the equity on their homes and make use of it in lieu of regular income.
With a reverse mortgage, the borrower retains ownership of the home. The loan doesn’t need to be repaid until the home is sold, the borrower (or eligible spouse) permanently leaves the home, or doesn’t meet their loan obligations.
Because they’re usually tax-free, reverse mortgage payments are good for a retiree on a fixed income, especially in cases where she has health care costs or other liabilities. However, the amount varies depending on the age of the youngest borrower and the value of the home.
The reverse mortgage ends after its specified term or when the homeowner dies or moves out. The bank doesn’t generally want to own your home, but it will take possession if the homeowner or her estate doesn’t pay the money back. The homeowners’ heirs may also opt to keep the house, by refinancing the loan into a traditional mortgage, or sell it themselves after paying the homeowners’ liabilities.
In recent years, larger banks have stopped offering reverse mortgages, mostly because they’re not great business for the lender. They’re also somewhat controversial because there’s little stopping borrowers from taking a lump sum and shipping off to Vegas for a party, leaving themselves and their estate in debt.
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Reverse mortgage example
Ethyl is in her 80s and still kickin’. She gets Social Security payments and has some modest retirement income, but she wants to live a little more comfortably. She takes out a reverse mortgage on her old home and starts receiving monthly payments based on its equity. After a few years, she passes away, and her son is on the hook for repaying the loan. Rather than pay it, he walks away from the loan and lets the bank sell the house.