Legal Definitions - Reverse mortgage

A reverse mortgage is a specialized type of loan available to homeowners, typically older adults, 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 mortgage, the lender makes payments to the homeowner. The loan does not require repayment as long as the homeowner lives in the home, maintains it, and pays property taxes and insurance. The loan becomes due and payable when the homeowner dies, sells the house, or permanently moves out.

Eligibility for reverse mortgages often includes specific criteria, such as the homeowner being at least 62 years of age, owning the property outright or having a very small existing mortgage, and meeting other financial and property conditions. The funds received can be used for any purpose, such as supplementing income, covering medical expenses, or making home improvements.

• Example 1: Supplementing Retirement Income

  Mr. and Mrs. Rodriguez, both aged 75, own their home free and clear. While they enjoy living there, their monthly pension and Social Security income are just enough to cover basic expenses, leaving little for leisure or unexpected costs. To improve their financial flexibility without selling their beloved home, they decide to take out a reverse mortgage. They opt to receive monthly payments directly from the lender.

  How it illustrates the term: The Rodriguezes are receiving cash payments from the lender, effectively "reversing" the usual mortgage payment flow. They do not have to make monthly loan payments, allowing them to stay in their home and use the funds to supplement their income. The loan will only become due when they both pass away or permanently move out, at which point their heirs would typically sell the home to repay the loan.

• Example 2: Covering Unexpected Medical Expenses

  Ms. Evelyn Reed, a 68-year-old widow, owns her home with a small remaining mortgage balance. She recently faced a significant, unexpected medical expense that her insurance did not fully cover, depleting her savings. She needs additional funds to pay the outstanding balance and maintain her financial stability without selling her home.

  How it illustrates the term: Ms. Reed qualifies for a reverse mortgage and chooses to receive a lump sum payment to cover her medical bills and pay off her small existing mortgage. She continues to live in her home without making monthly mortgage payments. The loan balance accrues over time, and repayment will be deferred until she sells the property or is no longer living there as her primary residence.

• Example 3: Funding Home Renovations

  Mr. Thomas Lee, aged 70, lives in an older home that requires significant repairs, including a new roof and updated plumbing. He has substantial equity in his home but lacks the liquid cash to fund these necessary renovations. He wants to ensure his home remains safe and comfortable for his remaining years without taking on a traditional monthly mortgage payment.

  How it illustrates the term: Mr. Lee obtains a reverse mortgage, opting for a line of credit. He draws funds from this line of credit as needed to pay for the roof replacement and plumbing upgrades. He does not have to make monthly payments on the amount he borrows. The loan balance grows only when he draws funds and accumulates interest, becoming repayable only when he eventually sells the house or moves out permanently.