Put simply, it's a loan. A homeowner who is 62 (60 in some cases) or older and has considerable equity in his or her home can borrower against the value of their home, and use the funds to pay off their current forward mortgage (if any). They can receive any additional loan proceeds in a lump sum, line of credit, or receive a monthly payment. Unlike a traditional mortgage, a reverse mortgage doesn't require the borrower to make monthly mortgage payments (but they can if they want to). Like a traditional mortgage, though, the borrower remains on title and is free to sell the home or leave it to their heirs in a will or living trust.
The entire loan balance becomes due once the last borrower passes away, moves out permanently, or sells the home. Federal regulations require lenders to structure loans so that the borrower's estate is not responsible for paying the difference if the loan balance becomes higher than the home's value. The interest that accrues on the loan is rolled into the new loan balance. What many borrowers don't realize is that if they want to make a payment, they can do so, which can help keep the balance low.
For seniors living on a fixed income and without other assets, a reverse mortgage is the only way they can tap into their home's equity to obtain needed cash without selling the home, or refinancing and thus taking on new monthly payments.
If you, or a loved one, is contemplating a reverse mortgage, you should know that the government requires them to attend a counseling session with a government certified reverse mortgage counselor. During the counseling session, the counselor will explain the loan to the potential borrower. This is an effective way for a borrower to learn about the product from a neutral government certified counselor, and thus make an educated decision on whether a reverse mortgage might be right for them.
If you have more questions about this product and whether it might be right for you, please give us a call and one of our specialists will be more than happy to provide you with additional information.