What is a Reverse Mortgage?

For the vast majority of Americans, their home is their largest asset. But many retirees don’t want to sell the home they’ve lived in for decades just to provide income for retirement. A good alternative for these people is a reverse mortgage.

What is a reverse mortgage?

A reverse mortgage is a way for seniors 62 and older to pull equity out of their homes without having to sell it. The way it works is that the homeowner receives a loan — either as a lump sum or line of credit — against the equity in his or her home. The process is similar to a home-equity loan, except that the homeowner does not have to pay back the loan in monthly installments. Instead, the loan gets paid back when the homeowner leaves the property or dies.

How does it work?

The application process for a reverse mortgage is similar to how you apply for a regular mortgage or home equity loan. The lender will have the house appraised and consider any mortgage debt you still owe to determine your equity in the property. The lender also will take your age into account. Because the lender is counting on the value of your home to pay off the mortgage, you are likely to get a higher loan amount at age 62 than you would at 75.

Advantages of a reverse mortgage

One of the biggest advantages of a reverse mortgage is that it allows you to tap the equity in your home without having to sell it and move. Another advantage is that the proceeds you receive are generally tax-free. A third advantage is that your lender takes on the risk of your home losing value.

Disadvantages of a reverse mortgage

The main disadvantage of a reverse mortgage is losing control of your home. In exchange for getting the money, you essentially give the home to the lender, which can sell it once you die or move out. That means if you have heirs who want the home, they would have to pay off the reverse mortgage to be able to keep it. Like regular mortgages and home equity loans, reverse mortgages also come with fees and closing costs. And while living in your home, you continue to be responsible for property taxes, insurance and maintenance costs.

Before applying for a reverse mortgage, it’s important to get the facts and study all your options. While a reverse mortgage may be a good choice for retirees whose wealth is tied up in their home, there may be alternatives that don’t involve signing away your family home.