What is a Reverse Mortgage?

Jennifer McClelland | RSS | Fri, Nov 27 2009 | 2 Comments

I know while the ads have definitely slowed down a bit, there are still many out there that advertise reverse mortgages. So what exactly is a reverse mortgage and is it the right choice for you?

First of all, a reverse mortgage is loan that is available to those who are above the age of 62 (if the borrower has a spouse, the bank will go by the age of the youngest spouse) that releases the home’s equity to the owners in payments or a lump sum. So, as it is called a “reverse mortgage” things are a bit reversed because the lender pays the borrower money rather than the other way in a traditional mortgage. In the case of a reverse mortgage, the homeowner is not obligated to pay the balance until the home sells or the owner passes away.

The people who decide to do a reverse mortgage do not have to sell their home (saying a homeowner is selling their home to the bank for a reverse mortgage is a common misconception), they do not have to give up the title to their home, and they do not have an additional mortgage payment (that would be a home equity line of credit).

A credit line from a reverse mortgage can be used for anything, but considering the age of the owners, it is typically used to fund retirement and expenses associated with retiring couples.

You may be wondering how exactly the interest rate works in a reverse mortgage. After I looked into it seems as though you are charged interest on the proceeds that you get from the reverse mortgage. However, you can get a low fixed rate (this is new however, most banks charge a variable rate). The rate is tied to indexes and do move as they move. However, the most typical one to track is the 1 year T-bill.

Reverse mortgages may be right for you if you need the money for retirement or anything really. However it is important to remember that it is a debt that must be paid back when the house sells (or, as I understand it, the owner moves out into a retirement community). Having the equity in your home can make a difference on the quality of living though. If you think that a reverse mortgage can benefit you, call or go into your local bank to find out more specifics about the process.

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Tags: home equity line, reverse mortgage, equity line of credit