Does a Home Have to Be Paid Off to Use Reverse Mortgages and How Do They Work?

by Tim Plaehn

A reverse mortgage allows older homeowners to get cash from the equity in their home with no payments required on the loan for as long as at least one owner remains living there. A first mortgage with a small balance should not be a barrier to obtaining a reverse mortgage.

Extra Money for Senior Homeowners

A reverse mortgage is a loan secured by the value of the home of a senior citizen. This type of loan is only available for homeowners age 62 or older. There are several ways the homeowner can receive the money and the loan does not have to be repaid with regular payments. The interest that accrues to the loan adds to the outstanding balance and the principal and accumulated interest are paid off when the home is sold. Reverse mortgages require a free-and-clear home, but any outstanding loan against the home could be paid out of the reverse proceeds, leaving the reverse mortgage as the only lien on the home.

Payment Options

The reverse mortgage payout to the homeowner can be set up as a one-time lump sum, monthly payments, a line of credit, or a combination lump sum plus ongoing payments. The amount that can be borrowed is based on the appraised value of the home and the age of the homeowner. There are a significant amount of upfront costs to this type of loan, which typically reduce the amount that ends up in the hands of the homeowner.

Homeowner Responsibilities

Although there are no payments to be made on a reverse mortgage, the homeowner must continue to pay the usual expenses of ownership, including property taxes, insurance and homeowner association dues. Part of the qualification for a reverse mortgage will be proof that the homeowner has the resources to keep up with these payments. Failure to pay one of the required items, such as property taxes, gives the reverse mortgage company the right to foreclose on the home.

Repayment Considerations

The outstanding balance on a reverse mortgage must be repaid within approximately six months after the homeowner passes away or moves out of the home -- such as into a nursing home. The amount owed will include the interest that built up on the money that was borrowed. In most cases, the home will be sold, the amount owed paid to the reverse mortgage lender, and whatever is left will go to the homeowner if still living, or divided among the heirs. If the reverse mortgage balance is greater than the home's value, the lender must accept what the home sells for and cannot go after anyone for any shortfall.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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