A reverse mortgage is a loan that allows homeowners 62 and older to access the equity in their homes without having to make monthly payments. The loan is repaid when the borrower dies, sells the home, or moves out permanently.
Here is an example of how a reverse mortgage might work:
- John and Mary are 65 years old and own their home outright (not outstanding mortgage loan debts). The home is worth $400,000 today.
- John and Mary apply for a reverse mortgage. They are approved for a loan of $200,000.
- John and Mary can choose to receive the loan in a lump sum, a line of credit, or a series of monthly payments. They choose to receive the loan in a lump sum.
- Proceeds are 100% tax-free!
- John and Mary use the $200,000 to pay off their debts, make home improvements, and invest for retirement.
- John and Mary continue to live in their home and make no monthly payments on the loan.
- When John and Mary die, their heirs sell the home. The lender is repaid the loan balance, plus interest, out of the proceeds of the sale.
- Ideally the house value has gone up enough or more than to cover the increase of the reverse loan over time (negative amortization aka hence no payments).
It is important to note that reverse mortgages are a loan, and like any loan, there are risks involved. If you are considering a reverse mortgage, it is important to understand the terms of the loan and the risks involved before you sign any paperwork.
Here are some of the risks of reverse mortgages:
- Closing costs. Reverse mortgages have closing costs, which can be significant.
- Interest. Reverse mortgages accrue interest, which can add up over time.
- Repayment. The loan must be repaid when the borrower dies, sells the home, or moves out permanently. If the borrower is unable to repay the loan, the lender may foreclose on the home.
If you are considering a reverse mortgage, it is important to weigh the pros and cons carefully. You should also talk to a financial advisor to get personalized advice.
Here are some tips to help you decide if a reverse mortgage is right for you:
- Consider your financial situation. Reverse mortgages can be a good option for homeowners who need extra income in retirement. However, if you have other debts, such as credit card debt or a mortgage, a reverse mortgage may not be the best option for you.
- Consider your goals. Reverse mortgages can be used for a variety of purposes, such as paying for home improvements, medical expenses, or living expenses. It is important to decide what you want to use the money for before you apply for a reverse mortgage.
- Get information from multiple sources. There are a number of resources available to help you learn more about reverse mortgages, including the Consumer Financial Protection Bureau, the National Reverse Mortgage Lenders Association, and the National Council on Aging.
- Talk to a reverse mortgage counselor. A reverse mortgage counselor can help you understand the pros and cons of reverse mortgages and answer your questions.
- Get everything in writing. Before you sign any paperwork, make sure you understand all of the terms of the loan, including the interest rate, fees, and repayment options.