What Is A Reverse Mortgage?

April 29, 2014

If you are about to retire or have just retired, one of the things that you might have heard people talking about is reverse mortgages. You might be thinking that this is some kind of scam or pyramid scheme that someone has concocted, but actually it’s a legitimate way of raising money during your retirement and is fully endorsed by our federal government.

But what exactly is a reverse mortgage and is it something that can really help you out when you need to raise large sums of cash? Find out here!


Photo Credit: Jim Larrison (obtained from Flickr)

What is a reverse mortgage?

In layman’s terms, a reverse mortgage is a type of home loan that allows you to unlock some of the equity in your home into cash. It’s an increasingly popular way of raising money without needing to resort to selling your property, and the main selling point about reverse mortgages  is that you don’t have to pay any additional monthly fees to obtain one, unlike with traditional mortgages.

This type of home loan was created so that people that have retired and have a limited income can tap into the equity of their homes as a means of covering any additional monthly living expenses, pay for medical care and so forth.

Alternatively, if you just want to spend a year travelling around the world, the proceeds of a reverse mortgage can help you to pay for that too; in fact, there are generally no restrictions on what you can do with your reverse mortgage proceeds (depending on the type of reverse mortgage you take out)!

Why are they called “reverse” mortgages?

When you take out a traditional mortgage, you have to pay fixed monthly instalments until you own your home outright. But in this case, it is the lender that makes payments to the borrower, hence the use of the word “reverse”.

With reverse mortgages, you don’t need to pay the money you borrow back until you either sell your house or it is sold when you die. You must still pay your property taxes, homeowner’s insurance and any other associated fees that you currently pay.

Are there different types of reverse mortgages available?

There sure are! The three most-common types of reverse mortgages are:

  • Single-purpose – offered by a few state and local government organizations, this type of home loan is the least-expensive option but restricts what you can do with the proceeds (such as paying off property taxes or paying for home improvements), and are generally aimed at those with low incomes;

  • Federally-insured – these are also known as HECMs (Home Equity Conversion Mortgages) and can be used for any purpose;

  • Proprietary – same as above, except they are backed by private companies rather than the US government.

It’s worth checking for reverse mortgage news so that you can get the best deal, as new reverse mortgage offers appear all the time.

I hope that this blog post has been useful to you; do post a common below if you have any reverse mortgage tips that you want to share!


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