Understanding How Reverse Mortgages Work

Reviewed: February 04, 2015
By FinanceWeb

For many people, the equity in their home is their largest asset, and when it comes time to retire, they may be counting on tapping that asset for money to live on. Selling the home is an option, but for those who want to stay in their home and still tap the equity, a reverse mortgage is a good option.

What is a reverse mortgage?

A reverse mortgage is sort of like a home equity loan in reverse. It allows seniors 62 and older to tap the equity in their homes, but instead of making monthly payments to pay back the loan, as they would with a regular mortgage or home equity loan, they don’t have to pay anything back until they leave the home.

How does a reverse mortgage work?

Reverse mortgages work can work differently depending on whether you work with a government program or a private lender. But generally, you apply to a lender, which will evaluate your home and have it appraised. Your interest rate will be determined along with fees and closing costs. Then an amount will be set. Generally you can get about 55 percent of the equity in your home. For example, if your house is worth $300,000 and you own it free and clear, then you could get $165,000, which you can access different ways, such as taking a lump sum or getting monthly payments. You can use a reverse mortgage calculator to determine your potential amount.

Considerations

A reverse mortgage can be a good option, but there are some things you need to consider in determining if it’s the right choice for you. One big advantage of a reverse mortgage is that the proceeds you get from it are generally tax free. You also get to stay in your home while not having to make a monthly payment, and the home won’t be sold to pay your reverse mortgage debt until the last debtor has left the home. On the other hand, the title of your home stays in your name, meaning you are responsible for property taxes, homeowners insurance and all repairs. And you generally will not get as much money from a reverse mortgage as you will from selling your home.