All About A Reverse Mortgage


Reverse mortgages are to aging what regular mortgages are to youth. When a young couple takes out a mortgage to buy a house, they pay off the loan balance and increase their stake in the home. When an older couple takes out a reverse mortgage, they receive income from the bank instead of paying a portion of their income. Reverse mortgages are most beneficial to retirees who own their own home free and clear. In fact, applicants are required to be 62 years of age or older in order to take advantage of these types of mortgages.

Under a reverse mortgage, the lender makes payments to the borrower based on the value of the home. The catch is the mortgage comes due almost immediately after the borrower dies. Most of the time the borrower's heirs have to sell the home in order to cover the loan balance. This is actually a great deal for seniors, especially those who fall into the "home rich, cash poor" category. They own their home, but do not have much to show for a monthly income. The double stock market crashes of 2001 and 2008 took a big chunk out of most retiree's portfolios, leaving them with diminished income prospects.

Seniors can get a this mortgage through multiple sources: private lenders, state or local governments and the federal government. The federal government's Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage. The HECM program is run by the Federal Housing Administration (FHA).

Several advantages recommend these type of mortgages over other forms of income. The first is no credit check. Since the lender will make payments to the borrower, there is no necessity to check the borrower's credit. The reverse is true; the impetus is on the borrower to check the lender's credit. Another advantage is the diversity of income options. HECM reverse mortgages pay the borrower through a lump sum, monthly cash advances or a line of credit. The line of credit is the most interesting because the cash amount available increases by whatever the monthly rate is.

One major disadvantage of this mortgage is the fact that it is due almost immediately after the borrower dies. The most common method of paying off the mortgage balance is to sell the home. This means the borrower's heirs are deprived of an inherited property. This may not seem like such a big deal, but inheriting a paid-off house free and clear is quite a gift. Getting a reverse mortgage may matter to the borrower's heirs, so he would be wise to discuss it with them before making a decision. The income from a reverse mortgage comes at the price of decreasing the borrower's estate.

Joann Carlisle is a writer who enjoys sharing her experiences, knowledge, and advice on a number of different subjects. For more information about mortgages, Stumble Forward offers readers more on how a reverse mortgage works.
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