If my understanding of a mortgage is accurate, in that you (for lack of a better word) sell your house to the bank and buy it back, in monthly payments, then a reverse mortgage would be the bank slowly buying your house out from under you. Ive heard it described as a scam to get the old and financially illiterate people out of their homes so the bank can resale the house at a profit. I have to assume I misunderstood some part of this cuz none of that seems like it should be legal.
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A reverse mortgage lets the owner receive the cash benefit of owning their home while they still live.
Grampa Joe paid off his mortgage twenty years ago, so he owns his house, but he has no income.
A reverse mortgage pays Grampa Joe for the sale of his house while he still lives in it. Grampa Joe can then buy food and pay utilities even though he has no income.
A mortgage is where the bank pays the seller of the home, and you then pay the bank back over time until you fully own the house.
A reverse mortgage is where you own a house, and a bank pays you a monthly amount on which to live. When you die or move out of the house (ie. into a nursing home), the home gets sold and you have to repay the money paid out (plus interest) from the home sale proceeds.
Because reverse mortgages are typically targeted toward seniors — who own the house outright, and have limited income while sitting on an asset — and are complex financial documents, there is potential for misunderstandings, fraud/taking advantage of somebody who may not comprehend the transaction they’re undertaking, or whether doing so is even necessary. There may be legitimate uses for a reverse mortgage as a means of tapping into money somebody needs on which to live, but there is potential for it to be harmful if not fully understood.
Also, they get a bad rap from children/heirs who are caught by surprise that their inheritance is less than they expected because of their parents’ reverse mortgage debt coming out of any home sale proceeds.
So, you should be careful of reverse mortgage scams, but a legit reverse mortgage can be a good financial tool for seniors.
A regular mortgage involves you owing the bank money and repaying them over time. Your equity in the house increases while your cash decreases (because that cash is going to the Bank), and the Bank’s loan balance decreases while their cash increases.
A reverse mortgage can be structured as a lump sum payment, line of credit, or periodic payment – the periodic payment is easiest, so we’ll assume that.
With a reverse mortgage, the Bank pays you a certain amount periodically. Your equity in the home decreases while your cash increases, and the Bank’s loan increases while their cash decreases. You don’t make any payments on the loan amount until you die, when the Bank will sell the house and use the proceeds to repay your loan.
The bank doesn’t own your house at any point – they’re just entitled to their loan balance. This is the case for regular mortgages and reverse mortgages. If the loan balance is lower than your home’s value when you die, the estate gets the remaining funds.
>If my understanding of a mortgage is accurate, in that you (for lack of a better word) sell your house to the bank and buy it back, in monthly payments
No. A mortgage is a loan. You are not selling your home to the bank. When you take out a mortgage to buy a home you are taking out a loan with the property as collateral. You have legal ownership of the home, not the bank. The bank only gets ownership if you fail to make your payments and it begins foreclosure proceedings to claim ownership of the property in leiu of the remaining balance of the loan.
A reverse mortage is….. kinda weird. It’s aimed at people that no longer owe any money towards the home (they paid off the original loan). In a normal mortgage you take out a bulk loan, get a large sum of money, immediately use it to buy the home, and then begin paying back the loan over time. A reverse mortgage is… reversed. You still put the home up as collateral, but you receive the monthly payments and the amount you owe increases over time.
The banks still don’t really want the house, but they do want the loan paid off. Because the balance is rising over time, it often requires the sale of the home to pay. This results in heirs not being able to keep the property and receiving little, if any, of the money from the sale. It can also eat into other assets that would have gone to the heirs in order to pay off the loan if the sale of the home isn’t enough to cover the amount owed.
In a reverse mortgage, the bank loans you money every month, using the value of your home as collateral. This can be done either to obtain passive income during retirement or to effectively stop making mortgage payments.
So every month the bank loans you money. The loan balance does not come due until the homeowner stops living at the home (either due to moving away or death).
The downside is that a reverse mortgage locks homeowners into their houses for the rest of their life. If you move away, you have to pay back everything plus interest. What typically happens is that, after the reverse mortgage holder dies, the bank asks the decedent’s heirs to pay off the mortgage. If they decline, the bank sells the house, takes the loan balance, and distributes the rest to the heirs.
A reverse mortgage can wreak havoc on a family’s generational wealth, potentially leaving heirs with little or no inheritance. However reverse mortgages are very viable options for elderly individuals without heirs. For those who wish to leave a valuable inheritance to their heirs, reverse mortgages are problematic.
Suppose you did not plan well for retirement or have some other money troubles. You are too old to work, but you need/want a source of income to support you. The bright spot is that you own a home.
One option is to sell that home and move into a smaller home, apartment, with family etc. Obviously not an ideal situation, but nothing shady there. A reverse mortgage offers an option that is often more appealing than outright selling the home. It gives you a stream of income now in return for the promise that the next time you sell your home, enough goes back to the bank to pay for the money you’re getting now. In the end, you get less pure cash than if you had sold your home immediately, but you also get to continue living in that house and don’t have to pay rent/downsize/etc.
So a reverse mortgage won’t force someone out of their home, but it does ultimately look like the bank slowly buying it from them. It’s not part of a picture-perfect retirement and reduces the value of what your children inherit, but the same can be said for selling your home immediately. The real problem is whatever expenses cause you to need the money. A reverse mortgage is just a way of addressing that problem.
In a mortgage, you pay the bank monthly, then at the end you own the house.
In a reverse mortgage, the bank pays you monthly, then at the end the bank owns the house. You’re basically selling the house in slow motion.
Banks like them because they assume that housing prices will go up, so they’ll be able to sell the house for much more than it cost them. Older people like them because it gives them an additional and reliable stream of income “for nothing”, and they’re planning it out with the assumption that they’ll pass away before the reverse mortgage is finished.
The downside is that a house represents a massive amount of wealth, and it can no longer be passed down to children.
While interest rates were low, and house prices were rising, reverse mortgages were great. You could theoretically get paid some amount forever, as the house value was rising faster than the intest.
Now that interest rates are higher, and house prices are more stable, it’s not such a good thing. You will lose your house and all the equity in a number of years.
Firstly, I think you have a bit of a misunderstanding of a mortgage.
A mortgage is just a loan from a bank to give you the money needed to buy a property. The bank does NOT own the property, you do. Where the misconception is that the mortgage secured against the property. What this means, is that if you fail to repay it, the bank has a legal right to take ownership of the property and sell it. They will then use the money to settle the debt, and then any left over (if the debt was less than what they got from the sale) gets given to you.
A reverse mortgage is a misleading term. It’s the same as the above except its taken out much later in life, typically when you don’t have any other mortgage against the property. The main reason is that a lot of people have wealth that exists only in the value of their home – this is wealth they can’t convert to cash and spend without selling. A ‘reverse’ mortgage is just a new loan that is secured against the property, giving this person cash they can spend (either as a lump or a monthly payment). The idea is usually that when they die (or have no use for the property, e.g. moved with family or into a care home), the property is sold and the debt repaid.
They can be a very useful tool for people who want to enjoy their later years with spending money while not caring about e.g. passing on the full value of their home in inheritance. But they are complicated and sometimes poorly understood by the people taking them out who are attracted by the quick access to cash.
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