Many are not aware that these types of mortgages exist, but I can assure you they are real. Technically, you do have to pay back a reverse mortgage in some form or another. The borrower may not have to pay the loan back directly, but it could affect your loved ones later.
What is a Reverse Mortgage?
A Reverse Mortgage is a type of loan offered to U.S. citizens over the age of 62 who have built a considerable amount of equity in their homes. Most of these loans are administered and regulated by the United States Department of Housing and Urban Development. In a normal fixed-rate mortgage the borrower takes a loan against his or her credit and is required to pay back this loan with monthly installments. However, in the case of a reverse mortgage the borrower is not required to make any payments on the loan until one of the following circumstances is met; the home borrowed against has not been the place of residence for over 364 days, the home borrowed against has been sold, or the borrower dies. I know that is quite grim but it should have been obvious. If the borrower dies then the spouse, next of kin, or person(s) appointed in the will has the choice to either, refinance the house and continue to live in it or allow the lender to sell the home in order to account for the loan, plus some interest of course.
The Three types of Reverse Mortgages
Each one of the three types of reverse mortgages has it pros and cons just like anything. The first type is the Single-Purpose Reverse Mortgage. This type allows for the borrower to get the loan at a low interest rate, but in exchange the money may only be used toward a single purpose such as home repairs, paying off another mortgage, or pay for property taxes. It can be very beneficial but they are not available in every state.
The other two types, Home Equity Conversion Mortgage (HECM) and Proprietary Reverse Mortgages (PRM), are very similar in how they operate. An HECM is federally insured and backed by the Department of Housing and Urban Development. While a PRM is backed by the private lender, thus giving them the ability to amend the criteria of the loan so be careful! Both of these types of mortgages tend to be more expensive than the conventional home loan and the upfront costs such as origination fee and underwriter's fee can get steep pretty quickly. Please be sure to consider these things if you do not plan on staying in that particular house anymore or borrow small amount. The borrower might actually end up losing quite a bit of equity by overlooking details like these.
Typically, there is not an income restriction as the loan does not require a monthly payment to be made. Every qualifying loan is tax-free.