Legal Definitions - reverse annuity mortgage

A reverse annuity mortgage, often referred to simply as a reverse mortgage, is a specialized type of loan available to homeowners, typically those aged 62 or older, that allows them to convert a portion of their home equity into cash. Unlike a traditional mortgage where the homeowner makes monthly payments to the lender, with a reverse annuity mortgage, the lender makes payments to the homeowner. The homeowner retains ownership of their home and continues to live in it, without having to make monthly mortgage payments.

The loan becomes due and payable when the last borrower permanently moves out of the home, sells the property, or passes away. At that point, the loan balance, including accrued interest, must be repaid, usually from the sale of the home. The amount a homeowner can borrow depends on factors such as their age, the current interest rates, and the appraised value of their home.

Here are some examples illustrating how a reverse annuity mortgage works:

• Example 1: Supplementing Retirement Income
  Maria, a 75-year-old widow, owns her home outright and wants to stay there for the rest of her life. Her monthly income from social security and a small pension is just enough to cover basic living expenses, but she struggles with unexpected costs like home repairs or rising utility bills. To gain more financial flexibility, Maria decides to take out a reverse annuity mortgage. The lender assesses her home's value and offers her a series of fixed monthly payments. Maria now receives this additional income each month, which helps her cover her expenses comfortably without having to sell her beloved home. She makes no monthly mortgage payments, and the loan balance will be repaid from the sale of the home after she passes away or moves out permanently.

• Example 2: Paying Off Existing Debt
  Robert and Susan, both in their early 70s, have significant equity in their home but are carrying a substantial amount of credit card debt with high interest rates. They are concerned about the financial strain and want to eliminate this debt to reduce their monthly obligations. They apply for a reverse annuity mortgage and opt to receive a large lump sum payment. They use this money to pay off all their credit card balances, significantly reducing their financial stress and freeing up cash flow. They continue to live in their home without making mortgage payments, and the loan, including the lump sum and accrued interest, will be repaid when they eventually sell the house or are no longer living there.

• Example 3: Creating an Emergency Fund
  David, age 68, is financially stable but wants a safety net for potential future medical expenses or major home renovations. He doesn't need regular income but desires access to funds if an emergency arises. David secures a reverse annuity mortgage with a line of credit option. This allows him to draw funds as needed, up to a pre-approved limit, rather than receiving monthly payments or a lump sum upfront. He only accrues interest on the amount he actually borrows. This provides him with peace of mind, knowing he has access to cash for unforeseen circumstances without having to sell his home. The loan will be repaid when he eventually leaves the property.