How Does a Reverse Mortgage Work?

Reverse mortgage loans are available to homeowners that are 62 years old or older and have equity in their home. The reverse mortgage is a great alternative for seniors who want to remain in their current home but are looking for additional cash flow to either enjoy retirement a little easier or to cover medical expenses.


Reverse Mortgage Defined

A reverse mortgage is a loan granted to a senior homeowner for a portion of their accrued equity. Whereas a traditional mortgage loan requires the homeowner to make monthly payments to the lender, with the reverse mortgage loan, the lender will pay the homeowner from the equity. Funds from the reverse mortgage loan can be paid in a single payment, monthly payments, or a credit line.


How It Works

With the reverse mortgage, you continue living in the home, as long as you maintain insurance coverage, pay applicable taxes, and keep your home well maintained. The loan or loan interest does not become due for repayment until the homeowner discontinues occupying the house as the primary residence, or sells the home. At that time the reverse mortgage loan and the accrued interest must be paid in full.


Payment Options for the Borrower

There are different options available for the buyer to access the reverse mortgage funds.

  • Scheduled payments can be made for a specific amount and time period, which is also referred to as a “term payment.”

  • Lump sum option is also available but the applicable restrictions offer much less flexibility in the long term.

  • A line of credit is also available and can be accessed however and whenever the borrower chooses.

  • A “tenure payment,” or guaranteed life payment will pay the borrower as long as they continue to live on premises.

  • There are also “blended” options available, which consist of varying combinations of the above options.


What are the Pros and Cons?

Having extra cash available for living expenses or enjoyment is certainly appealing, but carefully consider your situation and the advantages and disadvantages. Here are the primary pros and cons to be familiar with:


Pros:

  • No monthly payments are required towards the balance of the loan.

  • The cash flow relieves stress and can be used as the borrower chooses.

  • If the borrower has a spouse that was excluded from the loan, he or she may continue living in the home even after the death of the borrower.


Cons:

  • Fees attached to the loan can be excessive.

  • Based on the equity amount of a home, which could limit resources in other ways, should the equity be excessive.


The reverse mortgage loan is considered the last loan anyone will ever need, so opting for a reverse mortgage loan on a home that you don’t intend to be your forever home is not a good solution. However, if financial struggles are preventing you from experiencing the benefits of retirement, the reverse mortgage may be the best option.


Read more about how to help your aging family member manage their finances.