Most people associate a mortgage with a predetermined set of payments, usually monthly, that you are obligated to make to your lender until your debt (principal and interest) has been satisfied. This borrower-to-lender flow of payments is known as a traditional mortgage.
A reverse mortgage reverses the process. Instead of making monthly payments to your lender, your lender makes payments to you.
Let’s take a closer look at how this happens.
If you qualify for a reverse mortgage (see below), the first thing your reverse mortgage will do is pay off your current mortgage, if one still exists. Although repayment of the old mortgage means you have no more monthly mortgage payments, you are still responsible for maintaining your home and paying property taxes and homeowners insurance, as you did with a traditional mortgage.
You still have a mortgage, only now it’s a reverse mortgage. With a reverse mortgage, monthly mortgage payments are optional. A new reverse mortgage does not have to be repaid until you sell or permanently leave the home, pass away, or fail to honor your loan terms. It’s conceivable that if you take out a reverse mortgage at 62, the earliest age to qualify for one, you could live in your current home for decades without making a monthly mortgage payment.
No monthly mortgage payments, greater cash flow
The same amount of money once directed toward making monthly mortgage payments is now money that can increase your cash flow. Without the burden of monthly mortgage payments, you have more freedom and flexibility to manage your retirement. However, borrower(s) must continue to pay property taxes and homeowner’s insurance, maintain the home, and otherwise comply with the loan terms.
If your home equity is greater than what was needed to pay off your existing mortgage, or your home was already paid off, a portion of your home equity will be distributed to you in a payment plan of your choice. Popular options include a lump sum payment, monthly payments, or a line of credit. You also have the option of combining plans.
When you consider that a reverse mortgage loan requires no monthly mortgage payments (Borrower(s) must continue to pay property taxes and homeowner’s insurance, maintain the home, and otherwise comply with the loan terms) and offers the possibility that you can receive periodic cash payments from your lender, it stands out as a viable retirement solution for many older Americans. How you use your tax-free cash is up to you.
To qualify for a reverse mortgage, you must:
- Be 62 or older (a non-borrowing spouse may be younger).
- Own and live in your home as your primary residence.
- Have enough home equity, such that any remaining mortgage balance you have is well below the value of your home. To learn more about reverse mortgages, speak to your AAG reverse mortgage professional.
Do you make monthly payments on a reverse mortgage?
No. Monthly mortgage payments on your reverse mortgage are optional. A reverse mortgage is still a debt, but your mortgage debt does not have to be repaid until you sell or permanently leave your home, pass away, or fail to honor your loan terms, which include maintaining your home and paying your property taxes and homeowners insurance.
Will I receive more money from a reverse mortgage if I own my home free and clear?
Yes. Your payout is based on your age, the prevailing interest rate, your home’s appraised value, and your amount of home equity (appraised home value minus any mortgage liens). If you don’t have any mortgages to pay off, your payout will be greater.
What’s the main difference between a traditional mortgage and a reverse mortgage? With a reverse mortgage loan, borrowers are not required to make monthly mortgage payments, but can do so if they choose to. The loan is repaid when you sell or permanently leave your home, pass away, or fail to honor your loan terms, which include maintaining your home and paying your property taxes and homeowners insurance.