What Is A Reverse Mortgage? And Should I Get One?

The tv commercials toting them aren’t as prevalent as they once were, but we still get a lot of questions about reverse mortgages from our estate planning clients. We’ve therefore put together this quick primer on them.

What is a reverse mortgage?

A reverse mortgage is exactly what it sounds like – the reverse of a mortgage. Instead of a home-buyer/borrower paying off a mortgage month by month and ending up with title to a home, a lender pays a homeowner to give up title to his or her home and ends up holding title to the property at the end of the process.

To put it another way, a reverse mortgage is sort of like a home equity loan. A lender, which is often a bank, gives a homeowner over the age of 62 a certain amount of money in exchange for something else. If it were truly a home equity loan, that something of value would be a repayment of the amount loaned plus interest. For a reverse mortgage, the something of value is the right to take possession of the home when the homeowner dies, moves, or wishes to sell the property.

In sum, the homeowner/borrower gets money and the lender ends up with the house.

How much money can you get?

The amount of money a homeowner can get varies based on how much equity is in the home, current interest rates, and the homeowner’s age. The money can be disbursed as a line of credit, a lump-sum payment, fixed monthly payments, or some combination of those.

If there is any equity remaining in the home after the homeowner vacates the property, the remainder is distributed to the homeowner or the homeowner’s estate.

What happens to the house?

The homeowner/borrower is allowed to live in the house as long as they want to. When the homeowner/borrower vacates the home, the lender takes title and possession of the property.

If family members of the homeowner/borrower want to keep the home, they must pay off the reverse mortgage by working with the lender. The homeowner/borrow cannot pass the home on to someone else because they no longer own it.

Who should consider getting a reverse mortgage?

Reverse mortgages are a popular way for people who are house rich, but cash poor to fund their retirement. Banks realized that the Boomer generation has lots of money tied up in real estate, but may not have any other assets they can retire on, so they started offering this product.

Is there a downside?

There are a couple of downsides to taking on a reverse mortgage.

First, is the fact that the lender essentially owns the home after the deal goes through since they have the right to take possession after the borrower vacates the premises. People who can’t comfortably afford the taxes, insurance, and maintenance costs associated with owning the home should think twice before taking out a reverse mortgage. The lender can foreclose on the property if the homeowner/borrower does not cover these costs and keep the home in good shape.

People considering a reverse mortgage should also consider whether the money they receive will make them ineligible for government benefits like Supplemental Security Income (SSI) or Medicaid.

Anything else?

If you have additional questions about reverse mortgages, or are thinking about getting one, we urge you to speak to an experienced estate planning attorney or financial planner. A short blog post can only give you ba