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What Is a Reverse Mortgage?

With so many of the US baby boomers retiring or getting close to retirement age, the topic of reverse mortgages has come up a lot in the media lately. Just the other day a client of mine was weighing the pros and cons of a reverse mortgage. But most people have no idea what a reverse mortgage is or if it would fit their lifestyle.

A reverse mortgage is a loan equal to a portion of a home’s equity, and you have to be at least 62 years old to qualify. The way it works is that a bank either pays the homeowner a set amount each month or provides a lump sum or access to a line of credit. The loan is then repaid when the borrower/homeowner sells the property or passes away. Interest rates for any type of loan vary from bank to bank, but this type of mortgage typically carries a higher interest rate.

There is one HUGE bonus to the reverse mortgage: If the homeowner sells the home for less than the amount of the reverse mortgage, the bank will assume the loss. Of course there are strings attached to anything that seems to good to be true. If the borrowers fall behind on the paying their home insurance or property taxes, the bank can foreclose. Also closing fees (origination and processing fees) can be up to $6,000 on a reverse mortgage. There is also a one-time mortgage insurance premium that can be as high at 2% of the appraised value.

You have to weigh the pros and cons. This is a great way to access the equity in your home if you have no other way to get to that money. Retired homeowners often can not get traditional home equity loans due to their reduced income. These types of loans can also help borrowers with medical expenses.

For more information on reverse mortgages and whether or not they fit your lifestyle, check out: consumer finance.gov

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