Reverse Mortgages are a bit of a mystery to me. Being a homeowner, I understand the concept of a mortgage. I understand that I agree to pay a certain amount each month, based on the terms of my mortgage, to a bank in order to some day, hopefully, own my house. I get that. But, Reverse Mortgages are still a bit of a mystery.
The way that I understand it, it works, like it’s name implies, in the opposite way that a mortgage does. Essentially, a bank is giving you a new mortgage on the house. But, rather than giving you the large lump some at the beginning (although that’s an option it seems) to pay off the previous owner (like you would in a purchase), the bank gives you a set amount, based on the terms of the loan, each period and adds that amount onto the amount owed. The loan continues that way until you decide to move out of the house, or sell it, at which point it becomes payable.
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In some ways, a reverse mortgage (more aptly called a Lifetime Mortgage in the U.K.) makes some sense. We’ll all need a certain amount of income available to us when we retire. If we’ve done it right, we should own our homes in full when we do retire. Which means that we should have a whole bunch of equity in our homes that normally would only become available to us by selling the house, or through a home equity loan. Obviously, if we want to continue to live in the house, selling isn’t an option. And, if we’re looking for additional income, the lump sum payout and resulting monthly payments of a home equity loan aren’t a very good option either.
Looked at in that way, a reverse mortgage could be a viable option for many retirees. The biggest downside to it would be that you’d basically be forced to sell the house (or your estate would be) and couldn’t then leave it to your children without also leaving them with a huge mortgage on the place. Is that the biggest deal in the world? I don’t happen to think so. In many cases, your children aren’t going to be living in the same town anyways, and won’t want to move just to take up residence in your house. So, the loss of the house as a physical residence probably won’t be a big deal. The loss of the money that the house represents for your estate could be the bigger deal. But, I’ve always been a fan of the thinking that it was your money you earned in the first place, why not enjoy it personally rather than leave a whole lot behind.
I’m curious though, how many of you have had any dealings with reverse mortgages? Have they been good? Bad? Otherwise? What are your opinions of them? What did I miss in my (admittedly sloppy, but I’m only 32, so it’s not that pertinent to me) research?