What Is A Reverse Mortgage?
A reverse mortgage is a structured loan type such that homeowners who are senior citizens aged 62 and over who have typically paid off their mortgage can get part of their home’s equity as tax-free income.
The funds can be flexibly disbursed as a lump sum, a regular monthly payment, or a line of credit.
As the name implies, it is a complete departure from a regular mortgage as lenders pay the homeowners and not the other way around.
Homeowners who opt for this solution usually have no means to support themselves and are therefore not required to sell their homes in their lifetimes.
They can divert proceeds to their living and health care expenses, debt repayment, and other bills as they consider appropriate to make their retirement more enjoyable.
It can serve as an option of last resort to borrowers facing foreclosure trying to stop it. As per the Federal Housing Administration, only houses, condominiums, or townhouses built on or after June 15, 1976, are eligible for a reverse mortgage, excluding co-ops.
As of the first quarter of 2019, the National Reverse Mortgage Lenders Association pegged the home equity of homeowners, aged 62 and over at $7.14 trillion, an all-time high since records began at the dawn of the millennium, hugely reflective of the huge wealth trapped in real estate for retirees.
It is only possible to cash in on the wealth through sale, downsizing, or reverse mortgages. The home serves as collateral with a forward mortgage, and upon the death of the homeowner, proceeds from sales go to their estate or them if they moved.
Proceeds from a reverse mortgage are not taxable, no initial payments are required, and the homeowner gets to keep the title to the home.
Reverse Mortgage Example
Types of reverse mortgages include the Home Equity Conversion Mortgage (HECM) and jumbo reverse mortgage or proprietary reserve mortgage.
John is 65 years old and owns a home worth $500,000. His mortgage is fully paid off. John decides to take out a reverse mortgage worth $200,000 with Finance of America.« Back to Glossary Index