Eli5: What is a reverse mortgage?
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A lot of wrong answers here. A reverse mortgage is a loan in which the payment stream is reversed. Instead of making payments to a lender, the lender issues you distributions based on your equity. Usually they cap at 50-60% or your homes value (mostly to ensure it doesn’t go underwater with negative amortization). With that 50-60% you can set up either a lump sum payment, term payments (payments for a set amount of time like 10 or 20 years), life payments (for the rest of your life) or a line of credit (pretty unique in that the credit lines scales up as your homes value increases). In addition you never are obligated to make a mortgage payment however you must reside in the home more than half of the year and maintain the prop taxes and insurance. Obviously if you don’t ever make payments your principal balance is going to continue to increase, but the idea is that your homes value will increase alongside it, and if you or your heirs decide to sell you’ll still have a decent chunk of equity. Additionally, it’s backed by HUD so you never owe more than the home is worth at maturity of the loan. Very unique product that actually benefits a lot of homeowners.
I always say if you have heirs you intend to leave you home to then it’s best to exhaust all other options prior to considering a reverse mortgage. On the other hand, if you don’t, and you have a substantial amount of equity and are coming across hard times it is a double whammy. You eliminate the need for a mortgage payment (potentially for the rest of your life) and can also set up distributions (again potentially for the rest of your life).
There is a lot of fear and negative connotations surrounding reverse mortgages as there were some pretty poorly designed programs back in the day. Nowadays the majority are HECM loans which are backed by HUD and are hardwired to avoid the homeowner “losing their home” (including required homeownership counseling prior to even applying). You always remain on title, you can always refinance out of a reverse mortgage back into a conventional mortgage and you can always sell. At any time.
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