The Risks and Rewards of Reverse Mortgages

A reverse mortgage is a loan that allows homeowners over the age of 62 to convert the equity in their home into cash. The loan is repaid when the homeowner dies, sells the home, or no longer lives in the home as their primary residence.

The main benefit of a reverse mortgage is that it allows seniors to access the equity in their home without having to sell their home or make monthly mortgage payments. The money can be used for any purpose, such as paying for healthcare expenses or traveling in retirement.

The major risk of a reverse mortgage is that the loan amount can quickly grow over time due to interest and fees. This can reduce the equity in the home and leave fewer assets for heirs. Additionally, if the homeowner does not keep up with property taxes, insurance, and maintenance, the loan can become due and the home can be foreclosed on.

To be eligible for a reverse mortgage, the homeowner must be at least 62 years old and own their home outright or have a low mortgage balance that can be paid off with the reverse mortgage. The home must also be the homeowner’s primary residence.

The loan amount in a reverse mortgage is determined by the value of the home, the age of the homeowner, and current interest rates. The older the homeowner and the more valuable the home, the more money they can receive from the reverse mortgage.

If the homeowner dies before the reverse mortgage is paid off, the loan is usually repaid by selling the home. If the home is sold for more than the loan balance, the excess funds go to the homeowner’s heirs. If the home is sold for less than the loan balance, the lender absorbs the loss.