Many people aged 62 or older are “house-rich and cash-poor.” In other words, their mortgages are paid off but they are living on limited fixed incomes. Reverse mortgages offer a way to continue owning and living in your home, while at the same time getting extra cash to live on. Here’s how they work.
You can take your cash as a regular monthly payment, as a single large lump sum, or as a line of credit that you can draw down as you need it. You can use the money for anything you want. The loan is guaranteed by the equity you have in your home.
What Is a Reverse Mortgage
and How Does It Work?
Reverse mortgages are loans.
The lender pays you while you continue to live in your home. The amount you are eligible to borrow generally is based on your age, the equity in your home and the interest rate the lender is charging. You retain title to your home and you are still responsible for paying property taxes and upkeep on the home.
You can live in the home until you die.
Depending on your reverse mortgage, repayment of the loan is due if you die or if you move or sell your home, or if you reach the end of the predetermined loan period. Usually, if you die, the lender does not take title to your home, but your heirs must pay off the loan. Generally, they will do this by selling or refinancing the home.
Your home value will always cover what you owe.
Your legal obligation to repay the loan is limited by the value of your home at the time the loan is repaid. You cannot be liable for more than the value of the home.
Reverse mortgages use up the equity in your home. The loan amount does goes up over time though. Interest is added to the principal loan balance each month, because it is not paid on a current basis. You will have fewer assets to leave your heirs.
Reverse Mortgages are regulated by the federal Truth in Lending Act.
This requires lenders to disclose the costs and terms of reverse mortgages. This includes the Annual Percentage Rate (APR) and payment terms. If you choose a credit line as your loan advance, lenders also must tell you of charges related to opening and using your credit account.
There are three types of reverse mortgage: FHA-insured, lender-insured, and uninsured. Each type has different costs and features and you should consult with family members, your attorney, or financial advisor before deciding which is best for you.
Reverse mortgages can be a great way to add to your monthly income during your retirement years.
Check out this great video on the myths and misconceptions about reverse mortgages.