Reverse Mortgage: What Is It?

Following are the basics of a reverse mortgage. If this type of loan seems right for you, contact a reverse mortgage lender for further information.

Qualifying for a Reverse Mortgage

Reverse mortgages are designed to help senior citizens only, so the youngest applicant must be at least 62 years old. The home to be mortgaged should be owned free and clear or have a very low mortgage balance compared to its value. There are no income requirements because there are no monthly payments. There are also no asset or credit score requirements. The approved loan amount is determined by the age of the borrowers, the equity in the home, and current interest rates.

What Is the Purpose of a Reverse Mortgage?

As the term "reverse" suggests, this type of mortgage works in the opposite direction from a traditional mortgage. The intention of a traditional mortgage is to purchase a home and the monthly payments decrease the balance and increase equity over time. A reverse mortgage's purpose is to provide cash to the homeowner by accessing the available equity and increasing the debt each month. The homeowner is required to live in the house. When the last borrower either passes away or moves out permanently, the loan becomes due. The borrower can never be required to repay more than the value of the home, regardless of its value or how much has been borrowed.

How Does a Reverse Mortgage Work?

A qualified borrower can withdraw the equity from their home either as a lump sum, a line of credit, in installments, or a combination of these. If the purpose for the reverse mortgage is to pay off an existing mortgage and end monthly mortgage payments, a lump sum distribution would be used. A line of credit is generally the cheapest distribution, because you only pay interest on the amount you actually use. The monthly installments can be chosen for a term, such as five years, or for tenure (your lifetime or as long as you live in your home).

What Are the Typical Costs?

The largest cost of a reverse mortgage will likely be mortgage interest. Because no monthly payments are made, the interest due continues to accrue until the home is either refinanced or sold to repay the loan. Normal closing costs associated with taking out a mortgage, such as an origination fee and an appraisal, will also apply. Mortgage insurance, required on all reverse mortgages, is usually the second highest cost associated with this loan. The reverse mortgage lender supplies you with a cost disclosure at the time of your application.