What is a Reverse Mortgage?


According to the U.S. Census Bureau, more than 10,000 Americans are turning 65 years old every day. And further, more than 50% of U.S. seniors have the majority of their net worth tied up in home equity. Based on this, you may be curious about the best way to access the equity you have built up in your home. You may have heard that there are multiple ways to tap into home equity, and you may even know of someone who has sold their home or taken out a Home Equity Loan, also known as a second mortgage. Fortunately, for those who do not want the disadvantages of selling their home or taking on another monthly mortgage payment, there is another option called a reverse mortgage.  A popular option with many senior homeowners, this loan product allows borrowers age 62 and older to access their home’s equity without having to take on any additional mortgage payments. Instead, a reverse mortgage allows you to access your equity by receiving payments from your lender, and repayment is due only when you permanently leave your residence.

History of Reverse Mortgages

Reverse mortgages were created with the simple intention of helping senior homeowners age in place by allowing them to access cash from their home equity without having to sell it. This concept began in the early 1960’s, when the loan was first written to help a widow afford to stay in her home after her husband passed away. From there, the concept caught on. By 1988, President Ronald Reagan authorized the Federal Housing Administration (FHA) to insure reverse mortgages when he signed the reverse mortgage bill into law. Since then, new reverse mortgage guidelines have been created, especially over the past two years, for the purpose of ensuring the product’s safety and stability.

Reverse Mortgage Misconceptions

As a relatively new type of mortgage loan, this product is not yet as well-known or widespread as traditional mortgages. Therefore, common misconceptions arise from the lack of knowledge about the product. The following are a few common misconceptions about reverse mortgages and their corresponding reality.

Misconception: You lose ownership of your home to the lender.

Reality: With a reverse mortgage, you still keep the title and ownership of your home.  As long as you fulfill the agreed-upon loan obligations, such as continuing to pay property taxes, maintenance, and home insurance, the lender cannot take ownership from you.

Misconception: Your children lose their inheritance.

Reality: The loan typically becomes due when the borrower permanently leaves the home. When this happens, the home is usually sold and the proceeds are used to pay off the reverse mortgage loan. Heirs will receive the remaining funds from the sale after the loan is paid off. Family members who want to inherit the home itself also have the option of repaying the reverse mortgage by refinancing or using cash funds as an alternative to selling.

Misconception: Seniors can’t trust reverse mortgage lenders.

Reality: Many companies in the reverse mortgage industry are reputable and trustworthy lenders, and have proven so by attaining accreditation and positive ratings with the Better Business Bureau. Seniors can easily find ethical lenders that have proven their reliability and credibility within the industry by identifying companies that are members of the National Reverse Mortgage Lenders Association and approved lender with the U.S. Department of Housing and Urban Development.

Misconception: You cannot get a reverse mortgage unless you have paid off your entire existing mortgage.

Reality: Fortunately for many seniors, this is not true. You may get a reverse mortgage even if you already have an existing mortgage. One benefit of a reverse mortgage is that any existing lien is automatically paid off by the reverse mortgage proceeds, which then eliminates a continuing monthly mortgage payment.

How a Reverse Mortgage Can Help You

For the last five decades, reverse mortgages have proven popular because of the variety of ways they can help.  Once closing this loan, seniors are able to take advantage of the flexibility that this financial product offers. The following are just a few of the ways in which borrowers may use their funds.

You can eliminate your existing monthly mortgage payment.

As previously mentioned, any existing liens must first be paid off with your reverse mortgage funds. Since there are no mandatory monthly mortgage payments for this loan, when you do this, it eliminates monthly mortgage payment obligations. The cash that used to go towards your mortgage is suddenly free for you to use as needed. In addition, no repayment of the loan is necessary unless and until you permanently leave the home. 

You can finally complete all the necessary repairs your home needs.

Another stipulation of a reverse mortgage loan is for you to maintain basic repairs of your home. Therefore, if there an improvement is needed, such as the repair of a leaky roof or a broken deck, some funds from your reverse mortgage may go towards fixing these items. Choosing a “set-aside” fund for home improvements/maintenance allows you to keep or increase your home’s current market value.

You can use funds for such necessities as paying medical bills.

When it comes to your good health, financial difficulty shouldn’t stand in the way. With a reverse mortgage, funds may be used for any reason, including paying for any procedures, medications, or visits needed, as well as paying off past medical bills.  

You can supplement your social security income or you can free-up extra cash by paying down credit cards.

Funds are not limited for medical purposes but may be put to use for everyday living expenses as well. For many retired seniors, a social security check is all the income they have, and it is simply not enough. With reverse mortgage funds, you may now be able to afford everyday living expenses that previously might have been a struggle. Credit card debt may be paid down or paid off, freeing up cash that used to be spent on minimum payments. 

You can age in the comfort of your home.

Reverse mortgages often enable what many see as priceless: the chance for borrowers to age in the home they know and love. If frequent or overnight medical attention is needed in your situation, a reverse mortgage can help you obtain in-home care instead of having to move into a nursing home.

If you want to access your home’s equity, a reverse mortgage is a viable choice to consider when compared with selling your home or getting a second mortgage. For more information,find a reputable reverse mortgage lender and connect with their loan professional to examine if this loan product can help you. And soon, you will be well on your way to getting the most out of the equity in your home.