A Primer on Reverse Mortgages

Economists have observed that, as housing prices have surged over the past several years, savings in 401(k) plans and FDIC-insured accounts have dwindled. This trend means many individuals approaching retirement are finding themselves "equity rich" yet "cash poor." It is not uncommon for people residing in multimillion-dollar homes to rely predominantly on Social Security for their day-to-day expenses.

A 1994 Advisory Council on Social Security report noted that reverse mortgages could serve as an additional income source for seniors. At that time, housing prices were not high enough for this option to be particularly impactful, but the situation has since changed.

A reverse mortgage is distinct from the conventional mortgage obtained when buying a home. Here are the key differences:

The Lender Pays You

With a reverse mortgage, you do not make monthly payments. Instead, the lender provides payments to you. These payments can be received as a lump sum, a regular monthly amount, or disbursed in a manner and timing of your choice, depending on the terms of the loan. The amount you receive is influenced by factors such as your age, the value of your home, and prevailing interest rates.

You Continue to Live in Your Home

The primary benefit of a reverse mortgage is that it allows you to stay in your home while receiving payments. The loan terms stipulate that you must continue to live in the home as your primary residence. You can still visit family, travel, and enjoy other activities, as long as the home remains your main residence.

You Retain Ownership of Your Home

A reverse mortgage does not constitute a sale. You maintain all rights of ownership, including the ability to paint, remodel, or sell the property. You can also will the home to your heirs. If the property is sold or if the last surviving homeowner passes away, the reverse mortgage must be repaid. The lender is entitled to receive only the amount disbursed plus accrued interest from the sale proceeds. Any remaining funds after repayment go to you, your spouse, or your estate.

The Principal Amount Increases With Each Payment

With a reverse mortgage, the principal amount owed increases as payments are made. This means that the total amount to be repaid grows over time. The final amount due is determined after the home is sold or when you and your spouse no longer reside in the property. This concept differs significantly from traditional mortgages.

You Can Never Owe More Than the Value of Your Home

For federally-backed reverse mortgage programs (such as HECM and Home Keepers), you will never owe more than the value of your home or the loan balance, whichever is lower. The lender cannot demand repayment beyond the value of the house from you, your surviving spouse, or your heirs, nor can they seek repayment from other assets.