Understanding Reverse Mortgages

by Matthew Perry
(last updated February 21, 2009)

I was floored when I learned about reverse mortgages, and with good reason: they're amazing! Aimed toward homeowners of advanced years, the main requirements for a reverse mortgage are more than sixty-two years of age and ownership of your home. To understand why you would need those things to qualify, what a reverse mortgage is, and how one could benefit you, let's quickly go over the definition of a 'forward' mortgage (normally just called a mortgage).

In a forward mortgage, you make a small down payment and borrow the rest of the money you need to buy a house. In return, you make monthly payments until your debt is gone. A reverse mortgage works in just the opposite way—thus the 'reverse.' Clever name, right?

Instead of you borrowing money to buy a house, a reverse mortgage pays you in advance for selling your house. The bank or institution from which you obtain your reverse mortgage pays you the value of your home, either in monthly installments, a lump sum, or an agreed upon amount, against the time when you die or leave your home permanently. That way, you can enjoy the money from selling your house without having to move out. It's a particularly useful setup for individuals who own their house, but don't have much money.

Be aware, though, that a reverse mortgage won't necessarily solve all your money problems. You remain responsible for property taxes, utilities, and everything else that goes with owning a home; after all, part of the charm behind these deals is that you can remain the owner. Also, there are generally fees and up-front costs that are not reversed, which mean that you still have to pay them. Depending on your lender, these fees can get very high. Also keep in mind that reverse mortgages leave less equity in your home for your heirs.

There are many times that elderly individuals enter into reverse mortgages so that they can tap into the equity in their homes and use it like a retirement annuity. One potential problem is if the person outlives the end of the mortgage. At that point, the money stops and the home belongs fully to someone else. That means that the person (or couple) may find themselves with no place to live.

Since reverse mortgages are attractive to the elderly, it is important to determine what happens to the mortgage when the mortgage holder dies. Does any remaining equity transfer directly to the estate, or does the equity simply vanish with the deed being transferred fully to the lender? You'll want to check the fine print for this detail.

Like forward mortgages, many different programs are available, including government options, so look around before locking yourself in to any one deal.

Author Bio

Matthew Perry

MORE FROM MATTHEW

Sticking to a Budget

Bring out your budgets and dust 'em off. You're ready to budget again, and this time you're sticking to it.

Discover More

Declaring Bankruptcy

Don't look so grim. Bankruptcy sure isn't fun, but it's not the end of the world; if you need to do it, here's how.

Discover More

What Should Be In My Safe Deposit Box?

With only a certain amount of space, it makes sense to be careful with the items you select for your safe deposit box. ...

Discover More
More Money Tips

Getting a Construction Loan

Whenever you decide to dive into that crazy pool of custom home building, you'll need to take out a special loan so you ...

Discover More

Picking a Mortgage Term

Picking a mortgage term is only one of the things you'll have to do when taking out a home loan, but fortunately it's one ...

Discover More

Buying a Home with Bad Credit

Bad credit can affect so much of how you conduct your affairs in life that you need to be careful with what you agree to ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 6Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is 4 - 0?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)