What Is a Reverse Mortgage and How Does It Work?

Learn the basics of a reverse mortgage.

A reverse mortgage is a financial device where borrowers can receive money based off the amount of equity they have in their home. Reverse mortgages offer a tool for senior citizens to supplement their retirement income. To be eligible for a reverse mortgage, a borrower must be at least 62 years of age. There are also restrictions regarding the residence. To name a few: it must be the borrowers’ primary residence, it must be in good condition, it must be paid off or almost paid off and it must be a single family home.

Unlike a traditional mortgage, a borrower in a reverse mortgage receives payments instead of making monthly payments back to the lender. This is true as long as the borrower lives in the home. Payments from a reverse mortgage can be in the form of one-time upfront payments or in monthly payments to the borrower. The borrower is however, still responsible for HOA fees, property taxes and insurance on the home. The balance of the loan becomes due once the home is sold or the borrower passes away.

Reverse mortgages are an alternative means to tapping the equity a borrower has in their home. More conventional options include selling the home, refinancing or taking out a home equity line of credit. However, these options may not be available or suitable if the borrower does not wish to move or is otherwise not qualified to obtain additional financing.

Several factors determine the amount that can be borrowed under a reverse mortgage. Generally, the amount that can be borrowed is based on the borrowers age, the value of the home and the interest rate of the loan. Thus, a borrower can expect to borrow more if they are older, have a more valuable home or a home with more equity or when the interest rates are lower.

In addition to maintaining residence at the property, borrowers must also comply with other restrictions. For instance, there are several fees that need to be paid, such as the origination fee, third party fees for appraisal, home inspections, title etc., an upfront mortgage insurance premium and also monthly insurance premiums over the course of the loan. These costs are generally financed in the loan and not paid out of pocket by the borrower. Finally, borrowers must maintain the home including staying on top of repairs as well as staying current on HOA fees and property taxes.

This article is intended to only be an introduction to reverse mortgages. There are many other aspects involved, including whether a reverse mortgage is the right choice. Oftentimes a reverse mortgage is not in the best interests of the borrower but can be packaged to appear attractive. Because these issues can be complex, subtle and often times difficult to spot, it is best to speak with a knowledgeable attorney if you have questions regarding reverse mortgages. Platt & Westby has offices in Phoenix, Arrowhead, Litchfield Park, Scottsdale and Gilbert Arizona.  If you have questions about a reverse mortgage, contact our office by calling 602-277-4441 or www.plattwestby.com for a free consultation with one of our experienced attorneys.