Have you heard about reverse mortgages? Wondering if you might benefit from obtaining one? Then you need to know what a reverse mortgage is.
A reverse mortgage is a loan secured by real property. It's a "nonrecourse loan," which means that the lender cannot sue the borrower for money if the value of the real property falls below the amount required to pay off the loan. The loan also must meet the following requirements:
- The loan provides cash advances to a borrower based on the equity or the value in the borrower's owner-occupied principal residence, which means that the real property involved in the reverse mortgage must be the borrower's primary home
- The loan requires no payment of principal, which is the amount borrowed, or interest until the entire loan becomes due and payable
- The loan is made by a lender that's licensed or chartered according to the law
The reverse mortgage constitutes a lien, or claim, against the residence to the extent of all advances of money to the borrower under the loan and all interest accrued on those advances. The reverse mortgage must be paid off before any lien that is filed or recorded after the reverse mortgage.
Pros of Reverse Mortgages
There are many advantages to taking out a reverse mortgage on your home, including:
- You will obtain funds to spend on things that you want or need, such as a vacation, medical bills or home repairs (depending on the kind of loan that you get)
- You can choose to receive the funds in equal installments, in advances through a line of credit or otherwise, in lump sums, or through a combination of these options
- You do not have to make payments on the loan until the entire amount becomes due and payable
- You will never owe more than the value of your home
- The lender cannot proceed against you or your heirs if the value of your home falls below the loan amount
Cons of Reverse Mortgages
There are some disadvantages to taking out a reverse mortgage on your home, including the fact that you are taking out a loan against your home and using up your equity. Also, the loan may become due and payable if:
- You sell the home
- All borrowers stop living in the home as a principal residence
- You fail to take care of the home or insure it
- An event occurs that is specified in the loan documents and jeopardizes the lender's security
Since a reverse mortgage is a loan, you will owe interest on the amounts that you receive from the lender. The total amount of interest that you owe increases as the term, or length, of the loan increases. Therefore, you will not be able to spend the same amount that your home is worth. If you want to have the total value of your home available to you, you will have to sell your home instead of taking out a loan on it.
For more information, you should contact AARP, which has some great consumer information on reverse mortgages. See AARP's discussion of alternatives to reverse mortgages and discussion of and links from its Reverse Mortgage Basics article.
Questions for Your Attorney
- What is a reverse mortgage?
- Can my lender sue me if the value of my home drops below the amount required to pay off the reverse mortgage?
- When can a reverse mortgage loan become due and payable?