Reverse Mortgages 101 | Reverse mortgages and how they work

Bank owned

At the end of a reverse mortgage, a home is bank-owned, even if the former homeowners still live there. Image: Flickr / nickbastian / CC-BY-ND

Most people have seen the commercials pushing reverse mortgages as the path to financial security. Reverse mortgages and how they work can be a bit confusing. Reverse mortgages are a way of selling a home back to the bank over time — but the terms can be a bit confusing.

Reverse mortgages and how they work – the basics

A reverse mortgage is basically a long-term way to sell your house back to a bank or financial institution. A homeowner who wants to get a reverse mortgage “applies” to a bank. The equity — the value — of the home is paid back to the homeowner. In either lump sum payments, monthly payments, or a line of credit, the financial institution pays the homeowner for the home. At the end of the reverse mortgage, the bank owns the home.

Reverse mortgages and how they work – the details

There are a few basic details that vary between reverse mortgages. Most reverse mortgages allow the homeowner to stay in the home as long as they would like. Not all reverse mortgages allow this, however, meaning that some people who take out a reverse mortgage will have to move out of their house once they’ve gotten money equal to the equity of the home. The amount of a reverse mortgage is smaller than the true equity of the home, as the fees and interest on the mortgage come out of the equity as well.

The increasing popularity of reverse mortgages

Reverse mortgages have been around for over two decades. They are becoming much more popular as a way for baby boomers to fund their later retirement years. The department of Housing and Urban Development issues about 90 percent of reverse mortgages, over 100,000 in fiscal year 2007. When the housing market crashed, the equity value of homes dropped significantly. For most older homeowners, however, their home is still the biggest store of value they have available to them. Reverse mortgages, when researched carefully and taken out with consideration of all the terms, can be a smart way to turn a home investment back into money.


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