How Do Reverse Mortgages Work?

Basics

Reverse mortgages are loans based on the value of a home that are not paid back, as long as the homeowner remains living in the home. The value of the home is turned into payments back to the homeowner. These funds may be paid as a lump sum onetime payment, a regularly monthly payment or a credit line, or a combination of these methods. The reverse mortgage is only available to homeowners age 62 and older.

Besides the age requirement for the reverse mortgage, the only other requirement is that the home should be paid off, or nearly paid off to obtain this type of loan. There are no credit checks and no income verifications since the homeowners do not make payments on the loan. The homeowner does have to remain living in the home as a primary place of residence for most of the year to qualify. If the homeowner moves out of the home, even for a nursing home facility, for most of the year, the loan becomes payable to the lender.

At the time of the last homeowner's death, the reverse mortgage loan becomes due. If the heirs wish to keep the property, they will need to pay off the mortgage or refinance the loan into a standard home loan. In most cases, the lender holding the reverse mortgage will call the loan due and take ownership of the home. They will sell the loan to repay the mortgage. If the home sells for less than the value of the mortgage, the estate is not obligated to pay the difference.

There are many benefits to the homeowner for this type of mortgage. The funds can pay for monthly living expenses, medical care needs, or even fund a trip around the world. Because payments may be structured in monthly payments to the homeowner, these mortgages are an excellent supplement to retirement income.

There are some drawbacks associated with a reverse mortgage that the homeowner should consider prior to obtaining them. There are fees associated with setting up the mortgage. There are also interest charges levied on the mortgage. These fees can cut into the actual value of the mortgage, decreasing monthly payouts to the homeowner. In addition, homeowners should inform heirs of these mortgages so there are no surprises at the time of death. All requirements for reverse mortgages should be fully understood before taking them on.