Reverse Mortgage

Definition

These loans use the equity in homes to provide payments as long as you continue to live in the home – but require full repayment when you die or move away.

Quick Summary

Intended primarily for elderly homeowners, reverse mortgages are true to their name: They offer you payments instead of requiring payments from you. At the end of the mortgage, a full repayment plus interest is made (typically by selling the house). These loans can continue for years but tend to automatically end when the borrower dies or moves out. This makes them a better option for older homeowners who don't intend to leave their home as an inheritance but do want extra money to take trips or enjoy a higher quality of life.

Pros and Cons

Pros

-Immediate, tax-free payments. The payments from a reverse mortgage start immediately and are tax-free. This allows the borrower to immediately use the funds without spending as much cash on initial costs.

-You keep the title. Until the loan ends, you keep the title for your home and continue other payments (such as homeowners insurance) as before, with few to no changes.

Cons

-Assets will be sold. When the borrower dies or the loan ends under other conditions, assets are usually sold to pay off the mortgage. These assets include vehicles and property, which means there may not be many assets left to inherit or pass on.

-The longer the loan lasts, the more you tend to owe. Interest payments can increase as the loan continues sometimes rising beyond the value of the property, which puts borrowers in the awkward position of betting on how long they are going to live.

-A controversial history. Those that prey on the elderly have used fraudulent versions of reverse mortgages to do so. Finding a quality lender that you can trust is a vital step.

What Else Should I Know?

There are several different types of reverse mortgages, typically based on who is offering them (government programs, commercial lenders, etc.). Examine all your options to find the best choice. Because reverse mortgages tend to focus on elderly homeowners and their assets, it's important to involve as much of the family as possible in the process so everyone knows what to expect and why the reverse mortgage is happening. Also note any options for customizing the mortgage: For example, there are certain arrangements that allow for a spouse to continue living in the home after the primary borrower has passed away.