A reverse mortgage will not exceed the value of the home over the life of the loan, and unlike a traditional mortgage, a reverse mortgage loan does not need to be repaid immediately. Payments on the loan do not begin until the borrower dies, sells the home, or moves away. Homeowners considering a reverse mortgage for themselves should consider all of the factors—and compare offers from a number of lenders—before deciding whether or not a reverse mortgage is right for them.
Although reverse mortgages do allow borrowers with equity in their homes to access credit when it’s needed, this type of loan can have a big impact on their legacy. For this reason, seniors who want to keep their home in the family or who would like to leave a large sum to their heirs may not consider this type of loan to be an acceptable option. If you are a senior who is considering getting a reverse mortgage or a conversion mortgage, understanding the basics can help you decide if this type of mortgage is right for you.
Understanding a Reverse Mortgage
Under traditional mortgages, buyers borrow money from lenders to purchase a home. Once the money has gone to the seller and the home is purchased, the homeowner begins to make a monthly mortgage payment to the lenders for the loan. With each mortgage payment that is made, the borrower builds equity. Home equity increases over time. When the mortgage has been fully repaid, the homeowner owns the house outright.
Under a reverse mortgage, the lenders decide how much the borrower can take out based on the current value of the home.
A reverse mortgage is very different. Under this type of mortgage, the lenders decide how much the borrower can take out based on the current value of the home and the borrower’s current equity. The lenders then make monthly payments to the borrower, or else the lenders provide the borrower with a line of credit or a lump sum payment. Sometimes borrowers get a combination of these options.
Even after the payments are under way, the homeowner keep possession of the house and the title. But the lender will calculate interest (often at a variable rate) on all money paid out to the homeowner. This interest will compound as the life of the loan progresses until the loan is fully repaid. Even though interest continues to accrue, however, the loan balance can never exceed the value of the home. If the borrower ends up receiving more money than the home is worth, the reverse mortgage lender will still only recover whatever money they make when the home is sold.