A reverse mortgage is a loan available to people over 62 years of age that enables a borrower to convert part of the equity in their home into cash.
Reverse mortgages were conceived to help people in or near retirement and with limited income use the money they have put into their home to pay off debts (including traditional mortgages), cover basic monthly living expenses or pay for health care. There is no restriction on how a borrower may use their reverse mortgage proceeds.
The loan is called a reverse mortgage because the traditional mortgage payback is reversed. Instead of making monthly payments to a lender (as with a traditional mortgage), the lender makes payments to the borrower.
The borrower is not required to pay back the loan until the home is sold or otherwise vacated. As long as the owner lives in the home, they are not required to make any monthly payments towards the loan balance, but must remain current on tax and insurance payments.
With a reverse mortgage, the homeowner always retain title to or ownership of the home. The lender never, at any point, owns the home even after the last surviving spouse permanently vacates the property.
The homeowner is responsible for paying their property taxes, homeowners insurance, condo fees and other financial charges. Any lapse in these policies can trigger a default on the loan. To help reduce future defaults, HUD requires lenders to conduct a financial assessment of all prospective borrowers as of January 13, 2014.
Loan fees can be paid out of the loan proceeds. This means a borrower incurs very little out-of-pocket expense to get a reverse mortgage. The only out-of-pocket expense is the appraisal fee, usually a few hundred dollars.
The loan balance is composed of the amount borrowed plus fees and closing costs plus interest. The loan balance grows as the borrower continues to live in the home. In other words, when the borrower sells or leaves the house, he or she will owe more than originally borrowed. If the owner dies, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. All remaining equity is inherited by the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.
Still confused? Think of it this way: a traditional mortgage is a balloon full of air that loses some air and gets smaller each time a payment is made… A reverse mortgage is an empty balloon that grows larger as time passes.