Reverse Mortgages – Definition & Detailed Explanation – Elderly Legal and Financial Planning Glossary

What is a reverse mortgage?

A reverse mortgage is a type of loan available to homeowners who are 62 years of age or older. Unlike a traditional mortgage where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the borrower. These payments can be received in a lump sum, monthly payments, or as a line of credit. The loan is typically repaid when the borrower sells the home, moves out of the home, or passes away.

Who is eligible for a reverse mortgage?

To be eligible for a reverse mortgage, the borrower must be at least 62 years old and own their home outright or have a low mortgage balance that can be paid off with the proceeds from the reverse mortgage. The home must also be the borrower’s primary residence. Additionally, the borrower must undergo a financial assessment to determine their ability to pay property taxes, homeowners insurance, and other ongoing expenses related to the home.

How does a reverse mortgage work?

When a borrower takes out a reverse mortgage, they receive payments from the lender based on the equity in their home. The amount of the loan is determined by factors such as the borrower’s age, the value of the home, and current interest rates. The borrower can choose to receive the funds in a lump sum, monthly payments, or as a line of credit. The loan does not have to be repaid until the borrower sells the home, moves out of the home, or passes away.

What are the pros and cons of a reverse mortgage?

Some of the pros of a reverse mortgage include providing additional income for retirees, allowing homeowners to stay in their homes without making monthly mortgage payments, and the ability to access the equity in their home. However, there are also cons to consider, such as high upfront costs, the potential for the loan balance to grow over time, and the impact on inheritance for heirs.

What happens to a reverse mortgage after the borrower passes away?

When the borrower passes away, the reverse mortgage becomes due and payable. The borrower’s heirs have the option to repay the loan and keep the home, sell the home to repay the loan, or walk away from the home and allow the lender to sell it to repay the loan. If the home is sold for more than the loan balance, the remaining equity goes to the borrower’s heirs.

How can an elderly person determine if a reverse mortgage is right for them?

Before taking out a reverse mortgage, it is important for elderly individuals to carefully consider their financial situation and goals. They should consult with a financial advisor or housing counselor to discuss the potential benefits and drawbacks of a reverse mortgage. Additionally, they should compare the costs of a reverse mortgage with other financial options available to them. Ultimately, the decision to take out a reverse mortgage should be based on the individual’s specific needs and circumstances.