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What Is a Reverse Mortgage?

Reverse mortgages allow homeowners to access the equity in their homes without having to take out a different type of loan or sell the house. Seniors frequently rely on reverse mortgages to supplement Social Security income, finance home improvements, or handle major medical expenses. It’s not surprising, then, that reverse mortgages are becoming increasingly popular as the American population ages. In this post, we’ll provide you with some reverse mortgage basics and help you decide if this type of loan is right for you.

What It Is

A reverse mortgage is a type of loan that you do not have to repay for as long as you live in your home. When a borrower takes out a reverse mortgage, he/she can receive payment all at once, on a monthly basis, or at intervals and in amounts of the borrower’s choosing. If you die, sell the home, or permanently move out, you must repay the amount of the loan plus interest.

Eligible Borrowers

All owners of the home have to apply for the reverse mortgage and complete the loan paperwork. For most reverse mortgage loans, all borrowers must be at least 62 years old. The homeowners usually use the home as their principal residence, or where they live the better part of the year. Most reverse mortgages require the property to be a single-family, one-unit dwelling in order to qualify. Typically, mobile homes are ineligible.

How It Works

As long as you live in your home, you will not have to pay back the loan. Because no monthly payments are required, the balance of the loan grows larger over time. As the debt grows, the amount of cash that would remain after you sold your home and paid the loan off becomes smaller. With most reverse mortgages, a borrower cannot owe more than the value of the home at the time of repayment. The borrower continues to own his/her home after the loan is taken out, which means he/she is still responsible for insurance, repairs, and property taxes.

What Borrowers Get

As mentioned before, a reverse mortgage can be paid in a lump sum, as a monthly loan advance, or as a line of credit that allows the borrower to decide how much cash to use and when. The cheapest reverse mortgages are typically offered by state and local governments. Private sector loans are also available from mortgage companies, banks, and savings associations. How much money a borrower can get from a private sector loan usually depends on his/her age, the cost of the loan, and the value and location of the home. The largest cash payouts tend to go to the oldest borrowers who have the most expensive homes and loans with minimal costs.

What Borrowers Pay

Government-subsidized reverse mortgages have low or no fees and very reasonable interest rates. On the other hand, private sector reverse mortgages tend to be very expensive with a long list of costs. A reverse mortgage will be the most expensive in the first few years of the loan, after which it will become cheaper and cheaper over time. Reverse mortgages will be least costly if the borrower outlives his/her life expectancy, as the short-term costs of these loans are high.

National Rate Averages

Mortgage Rates

Product Rate
5/1 yr ARM 3.147%
1 yr ARM 3.299%
15 yr fixed 3.221%
30 yr fixed 3.815%

Home Equity Rates

* Updated Jun 7, 2012