How Does a Reverse Mortgage Work

By: Want To Know It

Reverse mortgages (called lifetime mortgages in the UK and sometimes called home equity loans) are basically the ‘opposite’ (or ‘reverse’, hence the name) of ordinary mortgages. Here is how a reverse mortgage works.

How It Works

Seniors (over 62 in the United States and 60 in Australia) are the only people allowed to apply for reverse mortgages. Basically, seniors can borrow money against the value of their home. That is why it is the reverse of an ordinary mortgage, as you are borrowing against your home instead of borrowing to buy the home. You do not have to pay anything off the mortgage until it comes to an end, although the interest and fees on the loan continue to accrue. Reverse mortgages come to an end in the following circumstances:

• The house is sold
• You permanently move out from your home
• Death

Once the loan is ended, you (or, if you have passed away, whoever you left the house to in your will) only have a set period of time (12 months in Australia) to pay back the loan. Hopefully, the sale of your house will be enough to cover the loan.

A Brief Look at the Pros and Cons of Reverse Mortgages

So, reverse mortgages can be useful for people who want to go traveling, buy a new car or just need money urgently. However, they can also be very dangerous. When interest rates are high, the value of the loan can increase rapidly and the sale of your home may not be enough to cover the mortgage. Even if it is, you may be left with very little money from the sale of your house after you pay back the mortgage. Taking out reverse mortgages can also impact welfare payments. If you are going to take out a reverse mortgage, you need to consider whether you will be able to pay it off with the sale of the house.

Other Financial Topics:

Why is it Important to Save Money

Prepaid Credit Cards for Teenagers

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