Reverse Mortgage

Posted In: Mortgage Basics

Reverse mortgages have gained a lot of attention in recent years as retired homeowners have sought new ways of using their equity and mortgage balance to satisfy their monthly expenses.

How It Works

Borrowers who obtain a reverse mortgage get cash back from the lender equivalent to the value of their home minus any remaining mortgage balances they still owe. So a homeowner whose home is worth $300,000, and whose current balance is $100,000, could obtain a reverse mortgage that would see them gain $200,000 back from the lender. This cash return can be made either as a lump sum or in monthly installments. The debt on the property increases with each cash installment the borrower gets back via the reverse mortgage. The balance of the reverse mortgage must be paid after the borrower dies or moves out of the property.

Benefits

The growth in popularity of reverse mortgages has led to a greater number of reverse mortgage products and more lenders offering them. Reverse mortgages have proved particularly popular with baby boomers, who tend to have an assertive and optimistic outlook on personal finances.

A reverse mortgage can be a real boon for people who own their home outright and are in their twilight years. They can borrow against the equity they have diligently accrued to pay for life's necessities. This is especially true in today's climate of rising medical expenses and dwindling pensions.

Restrictions and Pitfalls

There are several restrictions on reverse mortgages. Chiefly, borrowers must be at least 62 years of age, and the amount of cash the borrower can obtain from a reverse mortgage depends on their age, as well as other factors. Also, only one mortgage - the reverse mortgage - is allowed on a given property. All existing second mortgages are paid in full from the proceeds of the reverse mortgage upon its signing.

As with any mortgage product, reverse mortgages should not be taken lightly. Poor planning can leave a reverse mortgage borrower facing significant debt, just as his or her monthly income is shrinking and health deteriorating. In addition, reverse mortgage contract terms can be complex and very confusing, making it easy to be caught by unexpected nuances. And reverse mortgages require a lot of fees. In the end, a misunderstood and poorly constructed reverse mortgage can cost a homeowner a lot more money than a conventional second mortgage.