With a reverse mortgage, a bank or other lender sets the amount that you, the homeowner, can borrow. But instead of repaying the lender a fixed amount each month until the loan is paid off and you own the home - as you would with a regular mortgage - just the opposite happens: The lender gives you money against the equity in your home, either on a fixed schedule over a period of years, or as you request it.
The long-term effect is the reverse of a regular mortgage, too. With a regular mortgage, you build up your equity each time you make a payment. But with a reverse mortgage, your loan balance increases each time the lender gives you money. In other words, you accumulate a debit based on the value of your home in return for cash.
Because a reverse mortgage is a loan, just the way a regular mortgage is, the lender charges you interest. Sooner or later the lender will want back not only the full amount of the loan, or principal, but also the interest that has built up on the amount you borrowed.
In most agreements, the loan amount plus interest is paid off after you die or move out of your home, usually by selling the property. In the meantime, however, your share of the home's value is reduced though you continue to own it. When the house is eventually sold, the lender collects the principal, interest, and any accumulated fees or charges that are due on the loan. That leaves only what's left over, if anything, from the selling price for you or your heirs. But neither you or your heirs can ever owe more than the loan balance or the selling price of the home, whichever is less.
ARRANGING A DEAL
When you apply for a reverse mortgage, the lender determines how much you can borrow, the interest rate you'll pay, and the fees to arrange the loan. The loan amount is based on three things: the value of your house, your equity in it, and your age. Generally speaking, the older you are, the larger the loan you qualify for.
If you have used the full amount of your loan, and there's nothing left to draw on, you face the possibility of not being able to afford to go on living in your home. The same could happen to your surviving spouse. One of the advantages of government-insured reverse mortgages is that repayment is never due while you or your spouse is still living in the house. But that doesn't solve the problem of what happens if you are forced to move out because you're out of cash or you violate the conditions of the loan.
And if you decide to move after you're agreed to a reverse mortgage, you'll have to pay back all the money you've received, plus interest, closing costs on the loan, and any other expenses. That could use up most, or even all, of what you could sell your house for.
Despite their potential advantages, the interest rates and other expenses on reverse mortgages have tended to be high - something you should watch for when negotiating any agreement. It always pays to comparison shop for the best deal. And you may want to ask your legal or financial adviser for help, both in making the decision to borrow in this way and choosing the loan.
If you decide to take the reverse mortgage, you'll begin getting your money according to the terms you agree to. There are three different arrangements, in order of popularity:
- Lines of credit, which let you take money from your reverse mortgage account as you need it, usually by writing a check against the available balance
- Regular monthly payments, which are the most like a regular mortgage, but in reverse
- Lump sum payments, in which you get the total amount of the loan at one time
However, since 2013, there have been limits on the amount that can be withdrawn in the first year of the loan.
Some reverse mortgages are insured by the Federal Housing Administration (FHA). They guarantee that you'll get the full amount of the loan you've agreed to even if the lender gets into financial trouble. However, the FHA sets a cap on the amount you can borrow based on your equity and the housing market you live in. That amount is usually considerably less than the actual market value of the home, because the cost of the insurance in addition to the cost of borrowing must be covered by the loan.
| || |