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Reverse Mortgages 101

What Is A Reverse Mortgage?

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A reverse mortgage is a loan from a bank or other lending source that is secured by your home. It is called a "reverse" mortgage because instead of paying the bank like you do with a regular mortgage, the bank pays you, the home owner. The money the bank pays you is a loan.

Like a regular mortgage, the loan is secured by the equity in your house. ("Equity" is the difference between the amount you own on your home and the fair market value).

With a reverse mortgage:

  • The home must be your primary or principal place of residence.
    • Depending on the circumstances, the home can be single-family, one to four unit dwellings, a condominium, or a planned unit development.
    • Co-ops and mobile homes are generally not eligible.
  • The amount that you can receive is based on the value of your home, interest rates, the lender's policies, and your age. Your health is not relevant. Interest is adjustable.
  • There are no limits on what you can do with the money.
  • You continue to live in the home and have title (ownership) to it. The lender never owns the home.
  • You continue to pay property taxes and insurance. You also are required to continue to maintain the home.
  • The loan balance (the amount you owe) increases over time:
    • Each time you access money from a line of credit or receive a monthly payment.
    • Due to interest on the outstanding balance and (possibly) monthly fees.
  • No repayment of the loan is required as long as you continue to live in your home, maintain it, and don't owe more than the total authorized amount.
  • The loan is repaid when you (or the last surviving spouse) permanently moves or dies. At that point, you or your estate pays back the loan by either using private funds or seling the home. After the loan is repaid, any remaining cash goes to you or your estate.

Generally, the legal obligation to pay back the loan is limited to the value of the home. (The amount owed never exceeds the value of the home.) This feature, called "non-recourse" in legalese, means the lender can only look to the home for repayment of the loan, and not to the borrower, the borrower's other assets or the borrower's heirs. The heirs are only responsible for repayment if they wish to keep the home, in which case the reverse mortgage can usually be satisfied with a new conventional first mortgage obtained by the heirs.

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