Reverse Mortgage DefinitionLast Updated : 5/22/2013
What is a Reverse Mortgage? A reverse mortgage loan is a mortgage option which is exclusive to senior homeowners age 62 and up, allowing them to extract the accumulated equity within their property in order to receive cash - either in a lump sum, in installments, or as a line of credit.
How does a reverse mortgage work?
Essentially, the reverse mortgage process accomplishes the opposite of a forward (normal) mortgage, living up to its name; instead of making monthly mortgage payments in order to gain equity, homeowners basically sell their owned equity to receive payments. Once the equity has been depleted on the property, the borrower will no longer be able to receive payments; however, he or she may continue to live in the property until the loan becomes due.
Similar to any other loan, when you get a reverse mortgage, your current loan (if you have one) will be paid off with your new reverse mortgage. Hence your current monthly mortgage payments are wiped out. Additionally, you can access any equity you might have built in the property - tax-free!
Since reverse mortgages eliminate monthly mortgage payments, your mortgage balance will actually grow larger over time instead of shrinking as is the case with regular mortgages. This will in turn reduce the amount of equity you have left after selling or paying off the loan. The amount owed at the end of a reverse mortgage term (when the borrower has passed away or no longer resides in the house) is the lesser of the home value or the current mortgage balance.
On the bright side of things, the value of your home will continue to rise same as if you had a regular mortgage, helping you to build more equity as time goes on. You will also retain your place on the property's title and continue to own your home. A slight drawback is that you will still be responsible for property taxes, insurance and repairs.
When does a reverse mortgage loan become due?
A reverse mortgage only becomes due if the borrower passes away or vacates the property for 12 months or more. Although the borrower may completely exhaust the equity in the property, he or she may retain ownership while living in the home.
What happens after a reverse mortgage?
If the reverse mortgage borrower passes away, ownership of the home will pass to his or her heir(s), who will have two options:
- Keep the home. If an heir chooses to assume ownership over the home, he or she will need to secure a standard mortgage loan of sufficient size to pay off the reverse mortgage debt, paying off the mortgage in the same manner as with traditional home purchase.
- Sell the property. If the heir would prefer to sell the property, he or she may perform a sale, using the funds from the sale to pay off the reverse mortgage debt and claiming the profits for any remaining equity within the property.
Reverse Mortgage Eligibility
In order to obtain a reverse mortgage loan, borrowers must be a minimum of 62 years of age and occupy the home as a primary residence. Furthermore, since this program taps into the home’s equity, borrowers must own a minimum of 30% of the property’s equity to secure a reverse mortgage.
Note: If the value of the property decreases, such that the amount of the debt exceeds the sale value of the home, heirs of reverse mortgage borrowers will not be held responsible for this deficiency. However, if the value of the property increases, heirs will be able to receive the profits through a home sale or by securing a smaller mortgage loan to cover the debt, if keeping the home.
For an in-depth look at reverse mortgage requirements, visit our Lender411 Reverse Mortgage Qualifications page.
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If you would like to get a reverse mortgage or other home mortgages, visit our Lender411 main Reverse Mortgage page to conveniently connect with nearby lenders in your area. Start comparing loan offers today and take the first step toward a smart mortgage.