Reverse mortgages: What are they and how do they work?
Reverse mortgages were once a financial novelty and have now entered the home loan mainstream. This is very good news for senior homeowners who have to be 62 or older to qualify. Reverse mortgages are one of the few ways that seniors can cash out part of the equity in their home without moving or incurring loan payments.
Reverse mortgages are in essence mirror images of regular mortgages. As unbelievable as it sounds, rather than making payments to a lender, the lender actually makes payments to you in a lump sum in monthly installments. The best part is that you actually don’t have to repay the loan as long as you live in your home. The reverse mortgage is only repaid from the sale of your house, or after you move or die.
The only real negative aspect of reverse mortgages is that they usually have high upfront closing costs. Those charges have been falling, but even at 5% of a home’s value (which is about the going rate), reverse mortgages looks so much better when the alternative is to sell and pay 6% to a real estate agent.
What if the home’s value at the time of the sale doesn’t cover the balance of the reverse mortgage?
If the home’s value at the time of sale doesn’t cover the balance of the reverse mortgage, the lender is actually on the hook for the loss rather then the homeowner or his/her heirs. That is absolutely excellent downside protection. The upside is even better: If the property’s value rises over the years, the senior homeowner or his heirs can keep all of those profits after paying off the reverse mortgage. In other words, you can cash in on cashing out even when the market continues to trend upward. Overall, reverse mortgages are an excellent opportunity for seniors to take cash out on the equity of their home without moving or having to sell their property.
Information from Money magazine, August, 2005.
Additional information and webpage by Paul Susic Ph.D. Licensed Psychologist