A reverse mortgage is a loan used by homeowners age 62 and older to borrow money against his or her home equity. Home equity is the difference between your home’s market value and how much you still owe on the mortgage.
If you’re short on cash and having trouble paying your bills or current mortgage, a reverse mortgage will actually pay you money—usually as a lump sum, monthly checks or line of credit—so you can cover those costs.
How does a reverse mortgage work?
First, you and your spouse must both be 62 or older in order to apply for a reverse mortgage. Loans are granted or rejected based upon your age and life expectancy, value of the home, and amount borrowed—not your credit history.
Most states require you to have a counseling session with a United States Department of Housing and Urban Development (HUD) advisor before you sign the papers, so that you understand what’s involved. This counseling may be a casual phone call or a face-to-face meeting. Once approved, certain fees apply and are subtracted from the loan. As long as you live in the home, no repayments are due.
Then, if or when you need to sell the home, your proceeds go toward covering the remaining loan balance, plus any fees and interest.
Benefits and risks of a reverse mortgage
If you’re determined to stay in your home and really need help with bills, reverse mortgages can provide the much-needed money. You can use the money for anything, including home improvements, taxes, medical or credit card bills, insurance, or vacations, and you can stay in your current home as long as you pay your property taxes and homeowners insurance.
The biggest risk is that if you let your taxes or home insurance slide, you’re in default, and the bank can foreclose. In addition, when the last person on the loan moves out of the home (either you or any co-borrower), the loan comes due and must be repaid. Usually, this means the home must be sold to pay off the loan. Therefore, your heirs will not inherit the home, unless they make other arrangements to pay off the loan. Other risks may include high fees charged by the lender and interest rates that are often higher than those of a traditional home equity loan.
Reverse mortgage considerations
It’s important to know that interest is added to the loan each day, so that the total amount you owe may grow substantially over time.
Some important questions to ask when considering a reverse mortgage are:
- What kinds of fees are involved and how much are they? Upfront fees can be higher than regular mortgages.
- Also, if you have children, you may want to know: Will I be able to leave the home to them? A reverse mortgage won’t always—but can—grow to equal the value of your home, leaving you with nothing to pass on to your heirs.
For married couples, it’s important for both spouses to be named on the title of the home and therefore on the reverse mortgage. That’s because if just one of you is on the title of the home and something happens, your spouse may be forced to repay the money in order to stay in the home after you’re gone. If he or she can’t, your spouse may have to sell the home to pay off the loan.