What Is a Reverse Mortgage (and Should You Ever Get One)?
A reverse mortgage is a unique type of loan designed for homeowners age 62 or older. Unlike a traditional mortgage, in which you make monthly payments to the lender, a reverse mortgage allows you to borrow against your home and receive money from the lender. However, it is important to understand that a reverse mortgage is not a quick way to get free money: it requires several important considerations. Here’s what you need to know.
How does a reverse mortgage work?
As with a traditional mortgage, homeowners borrow money by using their home as security for the loan. But unlike a traditional mortgage, you don’t pay the lender monthly payments. Instead, the amount you owe grows over time. This happens for several reasons:
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The money you borrow accumulates
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Interest is calculated on the outstanding balance
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Various fees are added to the loan
Finally, the loan usually does not have to be repaid until you sell the home, move, or die.
Reasons why someone might get a reverse mortgage
As with home equity loans and home equity lines of credit (HELOCs) , the main reason someone might choose a reverse mortgage is to gain access to cash while borrowing against their capital. Especially for older people, this money can be used to cover living expenses later in life, often after they have run out of other savings or sources of income.
How much can you get on a reverse mortgage?
A reverse mortgage can be paid to you in any combination of the following:
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All in cash at once
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As a monthly income
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As a line of credit that allows you to decide how much you want and when
The amount you receive depends greatly on your age, the value and location of your home, and the cost of the loan. The largest amounts typically go to the oldest owners, those living in the most expensive homes, who receive loans at the lowest cost.
Most people make the most money from a Home Equity Conversion Mortgage (HECM) , a federally insured program.
Important Considerations
Don’t get it wrong: a reverse mortgage is not free money. It’s still a loan that will have to be repaid eventually. Your debt increases over time. Think about it this way:
Borrowed money + interest + commissions every month = growing loan balance.
But with a reverse mortgage, you continue to own your home, which means you are still responsible for property taxes, homeowners insurance, home repairs and maintenance, and so on. If you don’t pay property taxes, insurance, or maintain the home, the lender can use the loan to make those payments on your behalf or require you to repay the loan in full. Additionally, as your loan balance grows, it reduces the equity in your home, potentially leaving a smaller amount for your heirs . And the most obvious limitation: in most cases, you must be 62 or older to qualify for a reverse mortgage.
Bottom line
A reverse mortgage can provide financial flexibility for some older homeowners, but it is not without risks and responsibilities. It’s important to carefully consider your long-term financial goals, discuss your options with your family, and consult with a financial advisor before deciding whether a reverse mortgage is right for you. Remember: Although you won’t have monthly mortgage payments, you’ll still have to budget for property taxes, insurance and home maintenance to avoid defaulting on your loan.