What’s a “Reverse” Mortgage?
I met with a sweet elderly woman recently, whom I’d helped with a mortgage some years ago. She was struggling to make ends meet on her fixed social security and retirement income. Because of life circumstances, she didn’t have much money in her retirement account, and she was unsure how to manage emergencies, deferred maintenance on her home and rising medical bills. She wanted to find out if she could access the large amount of equity in her home.
I analyzed her situation to see how I could help. Because of her low income, she couldn’t qualify for much of a home equity loan, despite having great credit and lots of equity. She is independent, self-sufficient and loves her home and doesn’t want to sell it. Additionally, she loves her neighborhood and location, as she has been there for years.
As we talked and I listened to her goals and needs, it became clear that a “traditional” mortgage refinance or home equity loan wasn’t the best fit for her. We began to discuss a different kind of mortgage: A “Reverse Mortgage”.
This is an unusual mortgage loan product, but one that can be a good fit for situations such as this. Unlike a traditional “Forward Mortgage” where you borrow money and then make monthly payments to the lender, this loan doesn’t require any monthly mortgage payments, which can really help someone to improve their monthly cash flow. In addition, there are no credit or income qualifications necessary.
You have to be at least 62 years old to be eligible for a reverse mortgage, and the product works best if you either own your home free and clear or have a very small mortgage balance. The loan allows you to access equity in your home in a variety of ways: in a lump sum, in a monthly payment to you, via a line of credit, or in some combination of these options. There is no payment required from the borrower – the interest on the loan is accrued, causing the outstanding loan balance to rise over time.
As long as the home remains the primary residence of the borrower, there is no repayment required for their entire life. A common misconception is that the bank “owns the house” and takes all the equity. This is not the case. If the borrower dies or moves out of the home, the loan will need to be repaid, and the heirs/family can either sell the home or refinance the loan, allowing them to pay off the balance and keep any remaining equity.
There are many moving parts to this unique loan product, but it can be a helpful option for seniors in certain situations. If you have an aging family member or friend who is in this situation and may have questions about how a reverse mortgage works and whether this might be a good option for them, please let me know. I’d be happy to talk with them and give more details and specifics.
Thanks in advance for your referrals and recommendations!