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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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.
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