I've been asked, "What is a reverse mortgage?" so many times I've lost count. With a reverse mortgage, you can use your main asset to get a loan. As with any kind of loan, the ability to be flexible comes at a cost. A reverse mortgage is a loan that uses your house as collateral. This kind of deal is called "rising debt, falling equity."
If you want to compare a reverse mortgage to a more traditional one, you can call the type of mortgage most people use to buy a house a "forward mortgage." You must have a steady source of income if you want to get a forward mortgage. Since the asset is used to back the mortgage, if you stop making payments, your house can be taken away from you. As you pay off the mortgage, the difference between that and how much you've paid is your equity. When you pay off the last mortgage payment, the house is yours.
On the other hand, a person applying for a reverse mortgage doesn't need to have good credit or even a steady source of income. The most important rule is that the applicant must own the house. Most of the time, there is also a minimum age requirement. The older the applicant is, the more money they can borrow. Reverse mortgages must also be the only debt you have on your home.
Unlike a traditional "forward mortgage," your debt goes up as your equity goes up. Instead of making monthly payments, you pay interest on the amount you borrowed, which reduces your equity. If the loan is spread out over a long time, the mortgage may be due for a large amount. Also, if the value of your home went down, you might not have any equity left. On the other hand, if it went up, this could mean a gain in equity, but this doesn't happen often in the market.
There are a few ways to get money from a reverse mortgage: in one lump sum, in monthly instalments, or through a credit account. There are parts of this type of mortgage that mean the loan has to be paid back right away. For example, the loan has to be paid back when the borrower dies, sells the house, or moves out.
If you don't pay your home's property taxes or insurance, this will also lead to a default. The lender can also pay for these responsibilities by cutting your advances to cover the cost. Make sure you carefully read the loan papers to make sure you understand all the ways your loan could come due.
