Like a lot of the terms that are used in estate planning circles, the reverse mortgage is somewhat self explanatory. When you obtain a conventional mortgage, you usually have very little equity in the home when you first close. You essentially purchase portions of the equity each month from the lender when you make your mortgage payments. It you do this long enough you reach the point where you, not the lender, own all or most of the equity.
Let’s say that you do reach that point and you are at least 62 years of age. You are then eligible to obtain a reverse mortgage. Now the tables are turned; the lender makes payments to you, and in return it incrementally purchases equity that you have in the house. You can live in the home as long as you want to, but when you die or move the reverse mortgage must be paid. This is usually done by either you or your heirs selling the house and using the proceeds to settle up the debt. If there is a remainder it belongs to you or your heirs.
There are fees involved, and the loan can be called in if you don’t pay your property taxes or insurance, fail to maintain the house adequately, or if you do not reside in the home for a period of at least a year. There are no risks associated with default because you are not required to pay the lender anything at all.
Of course with a reverse mortgage you are decreasing the value of your estate to enjoy more liquidity while you are alive. How you feel about that is ultimately a personal decision, but the reverse mortgage is an option that is available to you if you have significant equity in your home and you are at least 62 years of age.
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