Reverse Mortgages Explained

A mortgage where you don’t have to make any loan payments might sound too good to be true–but thanks to reverse mortgages, they’re not. To put it simply, a reverse mortgage is a loan where a homeowner who is 62 or older and has sizable home equity can borrow money against the value of their home. They can receive fixed monthly payments, a nice lump sum, or even a line of credit.

But don’t get too excited yet–that money will have to get paid back eventually, whether it’s when you sell the home, move away permanently, or die. Naturally, the loan amount won’t ever exceed the value of your home nor will the borrower or borrower’s estate be held responsible for paying the difference if the loan balance does exceed the home’s value. This can happen either if your home’s market value takes a dip or if you live for a long time.

How Reverse Mortgages Benefit Senior Citizens

For elderly folks whose net worth is largely in their home’s equity, a reverse mortgage can get them a nice chunk of cold hard cash. But given the get-rich-quick air of reverse mortgages, they’re also prone to scams, so borrowers beware. What’s more, reverse mortgages are complex and costly, so knowing more about the process can help you make a better decision down the line.

Like forward mortgages, though, your home will be collateral if you can’t pay the interest on your loan. This means that the bank can still repossess your home and auction if off to pay off your balance. If you pass away and still have an outstanding balance on your reverse mortgage, then this auction process will also be used to sell the house and pay off the remaining loans. Any additional money made during the sale will go to the homeowner (if they’re alive) or homeowner’s estate (if they’re dead).

Another perk of reverse mortgages is that the proceeds made during a sale are non-taxable. Even though they might serve as income for the owner, the IRS considers it a loan advance, and therefore, non-taxable money.

Different Types of Reverse Mortgages

As we discussed earlier, there are a couple different ways to receive payments on a reverse mortgage.

  • Lump sum – Once your loan closes, you get all the proceeds. Unlike the other options, which have adjustable interest rates, this is the only option that comes with a fixed interest rate.
  • Line of credit – The homeowner can borrow money on a line of credit as needed, and they’ll only have to pay interest on the amounts they actually borrowed.
  • Equal monthly payments – Otherwise known as annuity or a tenure plan, the lender will make fixed monthly payments to the borrower so long as they keep living in their home as a principal residence.
  • Term payments – The borrower can choose a period during which the lender will give them fixed and equal monthly payments.

Give us a call or text us at 704-663-1600 today to schedule a consultation if you are considering or exploring a reverse mortgage.

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