A reverse mortgage is exactly what it sounds like: instead of paying down a mortgage balance every month, a homeowner receives a steady paycheck every month—paid out of the equity they have accumulated in their home.
It can be a way for retirees to receive regular income from real estate that they own.
To take out a reverse mortgage, you must:
The lender bases how much you can borrow on a number of factors, including your age, interest rates, and the amount of equity you have.
With a reverse mortgage, instead of paying the bank, the bank pays you.
A reverse mortgage is like steadily withdrawing money against the ATM of your home equity.
Here’s how it works:
You put up your house as security for the loan
The bank offers to pay you a lump sum, monthly payment,
or other structure of payments
The money first pays off any existing mortgage
You can use the remaining money for
living expenses or specific expenses
The loan balance increases over time
(as the principal you owe grows over time)
When you die, the loan is paid pack out of
your estate (or sooner if you sell your house)
Reverse mortgages are mainly used by retirees who need regular income. Instead of making a monthly payment toward a mortgage balance, retirees can use them to receive a monthly paycheck that’s paid from their home equity.
They might use this money to:
There are three main types of reverse mortgages:
Both traditional and reverse mortgages relate to owning a home, and both require a lender, but that’s about where the similarities end.
|What’s it for?||Used to build ownership in your home||Used to withdraw cash from your ownership in your home|
|Who’s it for?||Anyone||Homeowners aged 62 or over|
|How does repayment work?||Repay the balance over many years with interest||Loan is repaid (with interest) after you sell the house or die|
|Good to know||Build equity as you make your payments||Lose equity as you receive payments|
If you meet the age requirement and need a steady stream of money, then a reverse mortgage might sound like a pretty good deal. But bear in mind that there can be considerable risks:
|Lets seniors keep and stay in their homes||Fees can be significant—even higher than with a traditional mortgage|
|Can provide extra income to meet expenses||High interest can eat up your equity quickly|
|Could be cheaper than some home equity loans||Depletes your financial security over time|
Here are some other caveats to bear in mind when it comes to reverse mortgages:
Ultimately, for most retirees—whether or not to get a reverse mortgage isn’t a home run. The benefits of receiving a steady monthly paycheck can be substantial. But so can the risks of bringing a new lender into your finances and depleting your home equity.
Reverse mortgages can let retirees receive steady monthly paychecks out of the equity they’ve built in their homes—instead of making a monthly payment toward their outstanding mortgage balances. Although reverse mortgages can be convenient ways for seniors to pad their retirement income, they can also pose substantial risks.