Many consumers incorrectly believe that taking out a reverse mortgage means you’re transferring ownership of your house to a bank or lender, but this is not the case. You retain the title to your home. A reverse mortgage just allows you to tap into the equity you’ve built up in your home.
To determine if this is the best choice for you, you need to understand how they work and common questions that can arise.
What Is a Reverse Mortgage?
A reverse mortgage is a loan for homeowners age 62 or older that allows you to convert some of your home equity into cash. Some proprietary reverse mortgage products may be available to younger homeowners. Unlike a traditional mortgage, you’re not required to make monthly mortgage payments. The lender distributes your loan proceeds with a lump sum, fixed monthly payment, a line of credit, or a combination of the three.
Another difference between reverse and a traditional mortgage is how the balance is repaid. No monthly principal and interest payments are required. When the borrower sells the home, permanently moves, passes away, or fails to adhere to the loan obligations, the mortgage is paid off, typically through the sale of the home.
Who Owns My Home with a Reverse Mortgage?
You own your home when you take out a reverse mortgage. Ownership never changes hands, and you retain the title. As long as you continue to meet the terms of the loan, which include occupying the home as your primary residence and staying current on property taxes, homeowner’s insurance, homeowner’s association fees (if applicable), and repairs, you retain full ownership and can choose to sell at any time. If you sell the home, the reverse mortgage will need to be repaid.
Will My Children Still Inherit My House?
When the home is no longer your primary residence, the loan balance will need to be repaid. This is usually done by selling the home. Any remaining equity will be inherited by your children, according to your wishes. However, your heirs will have the option to pay off the loan if they would like to keep the house. While your heirs technically inherit the primary residence you left to them, they have no personal responsibility for your reverse mortgage debt.
Can I Pay Back My Reverse Mortgage?
As long as you uphold the terms of the loan, a reverse mortgage does not need to be repaid until the home is no longer your primary residence. However, you can choose to fully or partially repay the loan prior to this. The loan balance will include the amount you have received in cash to date, plus the interest and fees added to the loan balance each month.
The loan is due in full when the loan matures. Loan maturity happens when you sell the home, transfer the title, or permanently leave, such as when you move into an assisted living facility or family member’s home, travel for an extended period of time, or pass away. In this case, the home can be sold to pay off the loan. The loan would also need to be repaid if you fail to uphold the terms of the loan, such as paying taxes and insurance and maintaining the home.
If you or your heirs decide you want to keep the home, you or your heirs may be able to refinance the reverse mortgage into a traditional, forward mortgage. Or you may pay off the loan in full using your personal savings or other funds.
It’s important to know your retirement options when it comes to taking out a reverse mortgage. While it can be a good choice for maintaining your quality of life, it does impact what may happen to your house. By thinking things through, you can make the best decision for yourself and your family. It’s also always a good idea to consult a financial advisor.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.