Eli5: What is a reverse mortgage?
In: 308
It lets you borrow money at high interest rates, but in theory you do not have to pay it back until you are dead.
Pros:
1) If you live for a long time, the money you borrow plus interest might be more than the value of the house. You win!
2) Even if you die before the borrowed amount exceeds the value of the house, you never worried about the borrowed value exceeding the value of the house.
Cons:
1) If you have to sell the house, then you just took a very high interest loan over many years.
2) The companies that offer reverse mortgages are not idiots, it is unlikely that the value of your loan will ever exceed the value of your house. That means that you rarely “win”, and most likely just take a high interest loan.
Remember that not everyone gets to die in their own home. If you have to move to an assisted care facility, then you might have to sell to fund it, which means you lose. If your spouse dies early and you remarry and want to move, then you might sell your house and you lose. There are many many many life events that might prompt somebody to sell their house, more than people expect.
A better plan would be to take out home equity line of credit, the interest rate is usually substantially lower.
Latest Answers