Reverse Mortgage

A reverse mortgage (also called a reverse annuity mortgage or reverse amortization mortgage) is a form of home equity loan.  It is generally reserved for homeowners aged 62 years or older who have a substantial amount of equity in their house.  It is called a reverse mortgage because the homeowner receives monthly payments from the bank, unlike a conventional mortgage where the homeowner makes monthly payments to the bank.  This type of mortgage can often make sense for a retired or elderly person who has substantial equity in their home but who needs additional monthly income.

Under this type of loan, the homeowner receives a loan for a percentage of his equity in the house.  He continues to live in the home while receiving monthly payments from the lending institution.  The payments will continue for a specific number of years or for the duration of the homeowner’s life, depending upon how the loan contract is structured.  (Note that a reverse mortgage loan can also be structured to provide a lump-sum payment up front instead of monthly payments.  Or, the reverse mortgage loan can take the form or a credit line.)  The lending institution is paid back, including interest, by the sale of the home when the homeowner dies.  If the homeowner chooses to receive payments until his death, it is possible for the lender to end up paying more than the fair market value of the home. In this instance, the homeowner’s estate is required to compensate the bank for any amounts paid in excess of the net proceeds from the sale of the home.

Note that homeowners receiving a reverse mortgage are still required to pay all taxes, insurance, and repairs on their homes.  Failure to do so could cause the loan to become due and payable in full.

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