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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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.
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