What Is a Reverse Mortgage Loan?

by Sandy Baker ; Updated July 27, 2017

A reverse mortgage is a specialized type of mortgage designed for those over the age of 62 who need to liquidate the value in their homes to fund day-to-day living or special needs. Individuals who own their home outright or have a low balance on their mortgage may qualify for this type of loan. In this type of mortgage, the lender pays the homeowner a set amount of money over a period and, when the homeowner dies, the lender owns the home. One of the most common reverse mortgage programs is the FHA loan mortgage program. Other lenders do offer these programs, with similar requirements and costs. Individuals should compare other lenders' offers to the FHA reverse mortgage prior to investing in them.


To obtain a reverse mortgage, homeowners need to own only a small portion of the home's value on a mortgage. To qualify for the FHA reverse mortgage program, individuals will need to be at least 62 years of age. In addition, the reverse mortgage is only available to those who live in the home as their primary residence for most of the year. Requirements from third-party lenders offering reverse mortgages should receive careful consideration against the FHA program, since they may different. Homes must be single-family homes or those with one to four units, in which the owner who will become the borrower owns one unit. This may include condominiums and manufactured housing.


The loan term for a reverse mortgage isbased on the lifespan of the owners. Once all legal homeowners have passed away, the lender becomes owner of the property. The lender does provide up to 30 days for any heirs to purchase the home through another loan or otherwise, if they wish to do so. If not, the lender will sell the home to recoup the investment. The value of the homeowner's estate may be used to repay what was borrowed from the mortgage, plus interest and applicable fees. Heirs have no ability to reclaim the home other than purchasing it outright. Homeowners who are considering a reverse mortgage may wish to speak to their heirs about this decision.

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A reverse mortgage may pay out in one of several ways. Tenure may be in use in which equal monthly payments occur over the lifetime of the homeowner. When the last of the homeowners dies, or moves from the property, the loan ceases. A term limitation is an option in which equal monthly payments are sent over a specific period. In addition, the reverse mortgage may be used as a line of credit, borrowed from and repaid against as the homeowners need to over their lifetime or time of residence in the home.


The value of the reverse mortgage has a basis on the age, interest rates currently available and the value of the property. The property will need an appraisal to determine its value. The amount of payments and the value of those payments have a basis on the life expectancy of the individual as well.


Homeowners do not need to repay their reverse mortgage at any time, unless they would like to do so. If the homeowner moves from the home for more than six months of the year, including moving to an assisted-living facility or nursing home, the lender may deem the individual is no longer living in the home as her primary residence and call the loan due.


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