What is a Reverse Mortgage?

What is a Reverse Mortgage?
Have you seen Robert Wagner’s TV ad for reverse mortgages? With the sub-prime mortgage crisis forcing more than 1.5 million people to foreclose on their homes, this may be an alternative you may want to consider.

What is a reverse mortgage? According to AARP, it is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. You typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

The difference between a reverse mortgage and a traditional mortgage is that with the former, you are not subject to a credit check nor do you have to make monthly payments you cannot afford. In addition, since FICO scores need to be higher today in order to secure a loan, you need not worry about that either. More importantly, with a reverse mortgage, you will not lose your home to foreclosure.

AARP offers a clear and concise explanation of how “forward” or traditional mortgages affect you: When you purchased your home, you probably made a small down payment and borrowed the rest of the money you needed to buy it. Then you paid back your traditional “forward” mortgage loan every month over many years. During that time, your debt decreased and your home equity increased.

Reverse mortgages have a different purpose to forward mortgages. With a forward mortgage, you use your income to repay debt, and this builds up equity in your home. But with a reverse mortgage, you are taking the equity out in cash. Thus, you have the ability to live in your home and use the equity as payment against the reverse mortgage.

There is a downside, however, to reverse mortgages. When a reverse mortgage becomes due and payable, you may owe a lot of money and your equity may be very small. If you have the loan for a long time, or if your home’s value decreases, there may not be any equity left at the end of the loan. In short, a reverse mortgage is a “rising debt, falling equity” type of deal.

If this is the type of mortgage you are looking for; one that will allow you to use up all the home equity available while still living in your home, you may wish to research this type of mortgage further. Before making any decision, especially this specific one, talk with your family and a financial advisor to determine if a reverse mortgage is right for you.

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