If you have been online lately there is a chance that you have seen advertisements for reverse mortgages. With a reverse mortgage the bank actually pays you for your home. These loans are geared toward senior citizens making some assume that they are a scam. The truth is that seniors are the only ones that qualify for these loans as they are based on the equity that you have acquired in your home.
Before you look into a reverse mortgage you should know how a normal mortgage works. With a normal mortgage the borrower takes out a loan for a designated amount of money at a particular interest rate. This loan is then paid off in monthly mortgage payments. Mortgage loans are set up so that most of the interest is paid off in the beginning of the loan. After the interest is paid then the monthly payment is put mainly towards the principal of the loan. As the principal is paid the home builds equity. Equity is the amount that the home is worth above what the owner still owes.
When a home is bought when the borrower is young the loan is in most cases paid off by the time they reach their sixties. This is why reverse mortgage loans are only available to people who are sixty two or older. By the time that a mortgage is paid off the home has built quite a bit of equity. A reverse mortgage reaches into this equity and gives the owner payments, either monthly or in a lump sum. With a reverse mortgage you do not have to pay the money back until the owner dies, sells the house, or moves out permanently. If there is a payment arrangement the bank will be paid back, if not the house will be seized just as with a mortgage foreclosure.
There are both pros and cons to a reverse mortgage. For instance if money is borrowed in monthly payments and there is no cash reserve to fall back on when the mortgage is due, the house may be seized. This is a problem if they where planning to leave the house as part of an inheritance for their children. Of course once the house is sold any left over money would revert back to the estate but there would be a lot of extra fees charged.
The pros would be that if there was no one to leave the house to then the borrower can use the equity in their home and not have to worry about paying it back until after they have died or left the home. There is also the benefit of being able to take out some of the equity if it is needed for health care or medical bills.
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