A "reverse" mortgage 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. The cash
you get from a reverse mortgage can be paid
to you in several ways:
all at once, in a single lump sum of
cash;
as a regular monthly cash advance;
as a "credit
line" account that lets you decide
when and how much of your available cash
is paid to you; or
as a combination of these payment
methods.
No matter how this loan is paid out to
you, 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
60 years (or as
requested by your local lending institution)
of age or older.
To qualify for most loans, the lender
checks your income to see how much you can
afford to pay back each month. But with a
reverse mortgage, you don't have to make
monthly repayments. So you don't need a
minimum amount of income to qualify for a
reverse mortgage. You could have no income
and still be able to get a reverse mortgage.
With most home loans, you could lose
your home if you don't make your monthly
payments. But with a reverse mortgage, there
aren't any monthly repayments to make. So
you can't lose your home by not making them.
Most reverse mortgages require no repayment
for as long as you — or any co-owner(s) —
live in the home. So they differ from other
home loans in these important ways:
you don't need an income to qualify
for a reverse mortgage; and
you don't have to make monthly
repayments on a reverse mortgage.
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.
As you made each repayment, the amount
you owed (your debt or "loan balance") grew
smaller. But your ownership value (your
"equity") grew larger. If you eventually
made a final mortgage payment, you then owed
nothing, and your home equity equaled the
value of your home. In short, your forward
mortgage was a "falling debt, rising equity"
type of deal.
Reverse mortgages have a different
purpose than forward mortgages do. 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. So with a
reverse mortgage:
your debt increases; and
your home equity decreases.
It's just the opposite, or reverse, of a
forward mortgage. With a reverse mortgage,
the lender sends you cash, and you make no
repayments. So the amount you owe (your
debt) gets larger as you get more and more
cash and more interest is added to your loan
balance. As your debt grows, your equity
shrinks, unless your home's value is growing
at a high rate.
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.
But that is exactly what informed reverse
mortgage borrowers want: to "spend down"
their home equity while they live in their
homes, without having to make monthly loan
repayments. There's more about this
important concept in an article called "A
'Rising Debt' Loan" in the Basics section of
this site.
Exceptions
Reverse mortgages don't always have
rising debt and falling equity. If a home's
value grows rapidly, your equity could
increase over time. Or, if you only get one
loan advance and no interest is charged on
it, your debt would never change. So your
equity would grow as your home's value
increases. But most home values don't grow
at consistently high rates, and interest is
charged on most mortgages. So the majority
of reverse mortgages end up being "rising
debt, falling equity" loans.
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