Please explain reverese mortgages for me

November 10, 2009 9:58 AM

Please explain reverse mortgages to someone who isn't all that savvy about mortgages and property.

I've Googled for the basics, but would like an explanation that a layperson can understand -- including all the drawbacks.

Specific questions I have: Are they kind of a scam? (They're legal, but it sounds iffy to me.) Is it possible to pay them back, or is it a hole too big for most people to crawl out of? Does it have to be on the property you live in, or can it be a house you rent out? I'm in California, if that is relevant.

posted by doubtful_guest to Work & Money (12 answers total)

A reverse mortgage is selling your house, but only a bit at a time and you get to live in it while you sell it. Usually people die before the house is completely sold and so when the house is sold on the market most of the proceeds pay off the reverse mortgage and the remains go to the estate. But basically it's a way to sell your house and live in it at the same time, within limits.
posted by GuyZero at 10:00 AM on November 10, 2009

And no one pays them back. They're basically for retired people and they expect you to get out of it by dying. At least that's the only scenario I've ever seen them used in.
posted by GuyZero at 10:01 AM on November 10, 2009

Perhaps more than you want to know but here are a few links.

I am not your lawyer but I view these with caution, like any large loan.
posted by bearwife at 10:03 AM on November 10, 2009

Yep, GuyZero has it -- you're selling your house back to your bank, one month at a time, and you can stay there while the bank is paying you.

The biggest disadvantage is if you outlive the terms of your reverse mortgage -- i.e., you get it when you're 80 and you get a 15-year term because you think "ha, there's NO way I'm gonna live to be 95!" but then you DO live to 95, the bank pays its last payment and then says "okay, this is our house now, get out!" -- then you're kind of stuck.
posted by EmpressCallipygos at 10:04 AM on November 10, 2009

Also (again) if you had a rental property typically you'd just sell it to get cash or take out a loan with the house as collateral (a regular mortgage). I doubt anyone would give a reverse mortgage on a rental property if only for the fact that no one would want to take one out because there are better options for accessing equity in a rental property.
posted by GuyZero at 10:37 AM on November 10, 2009

"okay, this is our house now, get out!" -- then you're kind of stuck.

Not according to bearwife's hud.gov link:

6. Can the lender take my home away if I outlive the loan?

No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home.

And yes it must be in a house that you live in and own outright.
posted by Rhomboid at 11:05 AM on November 10, 2009

As Rhomboid said - it has to be your primary residence. And if you have a current mortgage it will be paid off and that balance added to your reverse mortgage. You can get a reverse "line of credit" as well.
Deal with a reputable company like Wells Fargo. Do your research. The upfront costs seen high but if you are not going to pay off that mortgage within the first 5 years it seems to average out ok. There are different methods of calculating interest so consider the options. Not a thing wrong with them if you are going to never move. It reduces your estate if that concerns you.
posted by JayRwv at 11:32 AM on November 10, 2009

Along these lines, since the bank can't kick you out until you die, there is usually a minimum age requirement (I think most places it's 62) for a reverse mortgage.
posted by phoenixy at 11:34 AM on November 10, 2009

Reverse Mortgages, an "ubernerd" post from Tanta (RIP) of Calculated Risk.
posted by Electric Dragon at 11:37 AM on November 10, 2009

There's a true story about a woman in France who worked out a reverse mortgage deal with some guy . . . and she ended up living to be the world's oldest woman. From wikipedia:

In 1965, aged 90, with no living heirs, Calment signed a deal to sell her former apartment to lawyer André-François Raffray, on a contingency contract. Raffray, then aged 47, agreed to pay her a monthly sum of 2,500 francs until she died, an agreement sometimes called a "reverse mortgage". Raffray ended up paying Calment more than the equivalent of $180,000, which was more than double the apartment's value. After Raffray's death from cancer at the age of 77, in 1995, his widow continued the payments until Calment's death.
posted by Dee Xtrovert at 11:42 AM on November 10, 2009

The French situation was actually him paying her rent in exchange for having the right to occupy the apartment next. It's sorta similar except the downside has unlimited liability for the guy where a reverse mortgage will only ever pay out the market value of the house. So he would have been better off with a reverse mortgage except she didn't own the apartment.
posted by GuyZero at 1:35 PM on November 10, 2009

The last part worth mentioning is that reputable financial institutions will not issue a reverse mortgage for people under age 65, unless they're in very ill health...
posted by thewalrus at 10:38 PM on November 10, 2009