I always thought that reverse mortgages were a way to loot money from senior citizens. But after some careful research on reverse mortgages, I found out that they really can give a helpful boost of income to a struggling homeowner. Since reverse mortgages are targeted specifically at an older demographic, there are opportunities for abuse, but as long as ethics are followed and meaningful regulations obeyed, homeowners and their equity will remain safe.
Reverse mortgages work like a standard mortgages, but in reverse.
- They release equity from the house as a lump sum, a credit line, or a monthly payment (tax free).
- The loan is only required to be repaid, if the home is sold or no longer used as their primary residence for 12 months or more.
- If the loan becomes due, the homeowner or heirs can sell the home and pay it off with the proceeds of the sale. They may even keep the house and refinance to receive positive cash flow if the loan on the reverse mortgage payment exceeds the refinance payment.
- The homeowner can never owe more than the value of the home.
- Heirs will never inherit debt and can ultimately choose to sell, refinance and buy it back, or let the lender take the property.
Two facts changed my mind about reverse mortgages:
1. Reverse mortgages require financial counseling.
This assures that homeowners understand exactly what they are getting into. The counselors are a neutral 3rd party and have no incentive to persuade anyone to sign any loan papers.
2. A homeowner with a reverse mortgage will never lose their home as long as they pay their property taxes and insurance.
A specific type of reverse mortgage called a “tenure payment” guarantees the homeowner a monthly payment for life! No matter how long they live, as long as the home functions as their primary residence, they will receive a monthly payment.