How Does a Reverse Mortgage Work?

How Does a Reverse Mortgage Work?
A young couple meeting with a mortgage broker

Basic Reverse Mortgage Requirements

If you’re married, only one of you must be age 62 or older. You must live in the home -- reverse mortgages aren't for investment properties. If you or your spouse need extended care in a facility, a 12-month exception allows the borrower to live in a facility without violating the mortgage terms. You don't have to own your home free and clear, however, your mortgage indebtedness should be minimal when qualifying for a reverse mortgage. There can be no other liens against your property. Many reverse mortgages require that you take a financial counseling course before you close. Counselors explain the details of the mortgage so you’re aware of how the mortgage works and your responsibilities as the borrower.

How the Lender Makes Money

Your reverse mortgage balance grows over the years. Rather than decrease as it would with a regular mortgage, it increases because interest on the loan accrues. If you sell your home, the loan is due immediately. If you die, your home must be sold or your heirs may keep the home, but must pay off the mortgage. A surviving spouse can continue to live in the home as long as she meets all the other terms of the mortgage. If you die and your mortgage balance is more than your home is worth, the lender is typically limited to receiving only the property’s actual value. Your lender won’t take over property taxes, insurance or maintenance costs for you -- you’ll have to keep these current on your own.

Options for Receiving Funds

The amount you can borrow depends on how much equity you have in your home, but you typically can’t take it all in cash. Some must remain to cover closing costs and interest, which your mortgage will accrue going forward. You can take the money in a lump sum, as a line of credit, as regular monthly payments, or as a combination of these options, although this may vary by lender.

Drawbacks to Reverse Mortgages

A reverse mortgage can present other concerns if you need long-term care. The government doesn’t consider the equity in your home to be an asset when you apply for Medicaid because it’s in your home and it’s not cash. Taking out a reverse mortgage, however, could bar you from qualifying. Closing costs are typically higher for reverse mortgages than for regular mortgages and will eat up some of your equity. If you sign reverse mortgage documents, then get cold feet, you typically have three business days to back out of the deal.