Reverse mortgages

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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.