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.
In: 2
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.
Latest Answers