A reverse mortgage is a special type of home loan that lets you convert equity in your home into cash. Equity is the value of your property minus the debt on your home. For example, a home worth $100,000, with no mortgage, has equity of $100,000. A home worth $100,000, with a $75,000 mortgage, has equity of $25,000.
When you obtain a conventional mortgage or Home Equity Line of Credit, you have to make payments to pay it back within a period of time. With a “Reverse Mortgage,” you do not make payments for as long as you continue to live in the home. When the last borrower moves out of the home or dies, the loan becomes due in full.
A reverse mortgage can benefit somebody over age 62 who needs cash and does not have sufficient cash assets or income. A reverse mortgage is not the best choice: if you have cash or enough income to pay your expenses and anticipated expenses, if you are trying to build up a savings account without need, or want to use money for unnecessary matters, if you intend to leave your home to family or others on death, if you believe you will not be able to remain in the home, or if you have a spouse or co-owner who does not qualify.
Costs tend to be high, but are built into the loan. Because of the costs, the unpaid principal and interest, and ongoing costs, the equity diminishes. Unless the value increases, there is often no value left to refinance the property again, or to pay off the mortgage before or after the homeowner dies. That is why one should not consider a reverse mortgage if they have money available and want the home to pass to their heirs when they die. But if one really needs the money, has the equity, and recognizes the drawbacks, a reverse mortgage can help.