Reverse Mortgage – What is it?

It’s much like a regular mortgage, but the way in which the money is paid out is a little different. With a reverse mortgage, the homeowner is leveraging the home equity they’ve built up, and the loan is paid out in a lump sum, line of credit, or set monthly payment.

The homeowner can use this money to pay medical expenses, finance home improvements, or even subsidize their monthly income. The amount they get from a reverse mortgage depends largely on their age and the equity they have in their home. As the bank pays out the reverse mortgage, the interest on that principal grows.

How Is a Reverse Mortgage Paid Back?

Unlike a traditional mortgage, a reverse mortgage may not have a set maturity date, or the date the loan must be repaid in full. The standards are set in the loan and may define maturity as the date that:

The borrower dies.
The borrower sells the property.
The borrower moves out of the home.
The borrower fails to provide reasonable upkeep or pay property taxes.

Once the home is sold, the lender has first right to the proceeds to recoup any outstanding balance on the reverse mortgage (unless there is also a lien on the home for unpaid property taxes). If the outstanding loan amount is less than the sale price, the homeowner or their next-of-kin will receive the difference.

Are There Limits on Selling a Home With a Reverse Mortgage?

The maturity date of a reverse mortgage is most often when the borrower sells their home. So the sale of the home is the most common part of the reverse mortgage process. With a traditional mortgage, you expect the home value to exceed the remaining balance of the mortgage at resale. But because the borrower of a reverse mortgage is typically being paid in installments, the mortgage principal increases rather than decreases. That makes it quite possible that the loan amount could eventually exceed the resale value of the borrower’s home. Therefore, the homeowner should focus on factors that can impact their home value the most, such as renovations, property condition and maintenance, and the status of property taxes.

More questions about reverse mortgage? Contact our San Ramon mortgage broker for more information or if you know someone who can use reverse mortgage.