Reverse Mortgage

A reverse mortgage, or ‘lifetime mortgage’ as it is sometimes called, is a type of loan available to seniors - the minimum age for eligibility in the US is 62 - that is used as a way of converting one’s home equity into one or more cash payments while still maintaining ownership of the property and without the introduction of monthly payments. The loan doesn’t need to be repaid until the borrower is no longer residing the in the property.

With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in a variety of ways and no matter how the loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

As you probably know, with a typical mortgage, the borrower pays a monthly amortized amount and after each payment the owner then has more equity in the house. Finally, after the term of the loan has passed (often 30 yrs.) the mortgage is paid in full and the property is released from the debt. With a reverse mortgage, however, the home owner pays nothing each month and all interest on the debt is added to the loan on the property. If the owner receives monthly payments, then the debt on the house increases each month.

The amount of money that an individual homeowner can receive from a reverse mortgage depends on: 1) their age, 2) the FHA or Fannie Mae (FNMA) appraised value of the property, and 3) the starting interest rate. The location of the home may even also have an impact as well. With a reverse mortgage, a borrower can be paid in a lump sum, monthly, through an increasing line of credit, or a combination of all three.

The loan ends when the homeowner dies, sells the house, or moves out for 12 consecutive months or more (to go into an assisted living home, for example). At that moment, the reverse mortgage can be paid off by the proceeds from the sale of the house, or refinanced by the heirs of the homeowner's estate. If the proceeds exceed the loan amount, the owner of the house (if moving out or selling) receives the difference; if the owner has died, the heirs receive the difference. For cases where the earnings are not sufficient to pay off the loan, then the bank (or insurance that the bank has, on the loan) makes up the difference.The biggest drawback with reverse mortgages of course is the high upfront costs. Some people might decide to consider other options that tap their home equity, especially if they don't plan on remaining in the house for at least five years.