How Does A Reverse Mortgage Work?

What to Know About How Reverse Mortgages Work

If you are 62 or older, you may have heard about reverse mortgages, but how does a reverse mortgage work? Can it be as good as it sounds? Reverse mortgages are unique mortgages in that they are only available to seniors and do not have monthly payments like other loans. Instead, a reverse mortgage allows you to access the equity in your home as a lump sum, line of credit, or monthly payments. While a reverse mortgage can have many advantages, it also comes with drawbacks related to high closing costs and difficulties passing the home on to heirs.

How Does a Reverse Mortgage Work?

A reverse mortgage is a loan option available to homeowners 62 or older who live in their home and have the home paid off or can pay off their existing mortgage with the proceeds of the reverse mortgage. This type of loan allows you to access the equity in your home, and the money can be used for anything, usually without taxes. The amount you receive with a reverse mortgage will depend on many factors, including your age, interest rates, and the value of your home. As long as you live in the home, you do not make any payments on the loan. A reverse mortgage becomes due when you sell the home, move out, or pass away. Because there are no payments with a reverse mortgage, the loan balance will steadily increase with interest. By the time you pass away or leave the home, the balance may far exceed the home’s value. Heirs are never responsible for paying the mortgage; they can either allow the bank to keep the home and owe nothing or pay the balance (up to the home’s market value) to keep the home.

Who Benefits from a Reverse Mortgage?

A reverse mortgage can make sense if you plan to remain in your home, can afford other home-related expenses, and want to access your equity without selling or taking out a loan with payments. Reverse mortgages can be used to pay down debt, get rid of your mortgage, or supplement your income in retirement. There are downsides to a reverse mortgage, however. The closing costs tend to be high, and because no payments are necessary, the loan balance will continue to rise. This can make it hard to pass the home to heirs as there is unlikely to be any remaining equity when the time comes. If you are considering a reverse mortgage, it’s important to look at all of your options. For example, you may be able to sell your life insurance policy to access a lump sum of money to pay down debt or supplement your income rather than turning to a costly reverse mortgage.