What is a reverse mortgage and how do people benefit from them?

Question

What exactly is a reverse mortgage? Why don't people have to pay it back?

Answer 1

A reverse mortgage is a loan that allows people ages 62 and up to get the money they need for any expenses they may have. Unlike traditional mortgages, there are no monthly payments on a reverse mortgage. The reverse mortgage isn’t paid until the person who took out the mortgage moves, sells the home or passes away. At that time, the reverse mortgage is paid out of the proceeds of the home sale.

Answer 2

This is what I do.  There are a couple misconceptions on other answers that I'd like to correct.

This loan is for people aged 62 and over.  It allows them to draw on some of the equity in their homes without having to make a mortgage payment for as long as they live in the house.  When they permanently leave the home or sell it, the mortgage is due.  Until that time, they pay their homeowner's insurance and real estate taxes but nothing to the lender.  

Credit and income, and naturally health, have no bearing on this loan.  Those things will not determine eligibility or the rate of interest.  

The qualifications are that all owners are over the age of 62, there's enough equity, generally 50% but the older you are the less equity is required, and that the house is an allowable type.  We can do it on 1 to 4 family homes, most condos, manufactured houses as long as they meet all the FHA requirements.  We can't do it on mobile homes, and probably never will because they are personal property not real property.  Right now we can't do co-ops, but the Housing Bill of 2008 will probably change that as well as the maximum value the FHA allows on the Home Equity Conversion Mortgage.  That's the one most people will get.  There may be some other changes from the new law.  It was signed a couple weeks ago and HUD is determining the implementation now.  Although I talk to people every day who tell me what the changes will be, the banks don't know yet and won't until HUD tells us.

You do not sell your house to the lender.  This is a mortgage.  In England they have a Reverse Mortgage Scheme (they use the word scheme very differently outside the US...not with the negative connotation we give it) in which the lender does buy the home and the person lives there for as long as they want.  But in the US, it's just a different type of mortgage.  

The loan amount will be based on the age of the youngest owner and the value of the home, as well as a couple other factors that are too involved to try to explain here.  Someone who is 62 will get considerably less than someone who is 92.

You cannot lose your home to foreclosure, because there are no payments to make as long as you live there.  The mortgage will be called in the case of the death of the last borrower, non-payment of taxes or home owner's insurance, or if you let the place deteriorate, although we don't have any mortgage police checking up on you.  These are the same circumstances that any type of mortgage would be called.

When the home is sold by the borrowers, the mortgage is paid at closing.  If the circumstances are such that the loan amount exceeds the market value of the home, the bank absorbs the lost.  This is called a non-recourse loan.  We'll take the market value price of the home, but you can't sell a $100,000 house to Cousin Joe for $40,000.  On any other mortgage we would foreclose, and you would still owe the rest of the money.

The heirs have the same options they would have on a home with any type of mortgage...pay with existing funds, refinance into their own names with adequate income and credit, or sell the home and pay from proceeds.  Excess proceeds are theirs, but they don't make up the difference if there's a shortfall of proceeds.

You cannot outlive the mortgage.  There are various ways to access your funds.  1) You can get a lump sum.  2) You can get a monthly check for a set amount of time.  3) You can get a monthly check for as long as you live in the house, no matter how long that is.  Even if you were there long enough to use up every penny of your equity, we'd still send a check every month while you live there.  4) You can have a credit line.  5) You can combine these ways too.  You get a chunk of money to buy a new car, then put the rest in the credit line.  Any combination is possible based on what makes sense for you.  The term of this loan is as long as one of the borrowers remains in the house.

Some lenders allow people who are not 62 to be on the warranty deed but not be borrowers.  In some states they can be on the warranty deed only if over 60.  But if there's one borrower and two owners, if that borrower dies or permanently leaves the home, the mortgage is due.

Sorry this is so long, but it's not a cut and paste.

Answer 3

Others have given you a good description you can also research it further by using a search engine like Google.  My only added comment is that not all Reverse Mortgages are created equally by a long shot.

If you or elder parents are considering it and you do not understand lots of legal language then get an Atty to look over the documents.  Please great care is needed!

Answer 4

It’s for the elderly. Basically you get paid from the equity in your home. It’s not due until they pass away or sell the house.

http://www.aarp.org/money/revmort/

http://www.hud.gov/offices/hsg/sfh/hecm/...

Answer 5

It only works if you have a lot of equity in your house. The way it works is that you are selling the house to a mortgage company and they are making payments to you and allowing you to stay in it. This can be a good thing for senior citizens. The bad thing is that if you outlive the mortgage then you have to move out.