When someone takes out a regular (forward) mortgage, the borrower makes monthly payments to pay the mortgage down. With a Reverse Mortgage, if you are approved there are no monthly payments and the mortgage balance instead goes up.
Why would anyone what to get a reverse mortgage? First of all, not everybody can. It’s only available to borrowers who are 62 years of age or older. How much equity you can access is based on your age and how much your home is worth. It is very popular for seniors who have limited income and have very small mortgages or no mortgage at all. The money that you get out of a reverse mortgage could be used for day-to-day expenses, in-home care, traveling or just to create a cushion of money in case you needed it.
What is most important to know is that you can never be removed from your home. The reverse mortgage stops when the homeowners pass away. The heirs then have six months to sell the property and pay the mortgage off, after which any proceeds are distributed to the heirs.
There are a few different payment options for a reverse mortgage.
- A monthly payment like an annuity for the rest of your life
- A line of credit with a limit that a homeowner can access whenever they want
- A lump sum of cash at closing along with an equity line available in Year 2 with a limit. This insures that the homeowner does not use up all their money within the first year.
Many people are against reverse mortgages because the closing cost are higher than a regular mortgage and also because having a mortgage that has a growing balance leaves less money for the heirs of the homeowners/seniors.
A lot of seniors are having a tough time with medical costs, prescriptions drug charges and just higher day-to-day living expenses. Reverse mortgages all seniors to access their equity and lead a more comfortable life.