Reverse Mortgage

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DEFINITION of 'Reverse Mortgage'

A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan.

Often, the lender will require that there can be no other liens against the home. Any existing liens must be paid off with the proceeds of the reverse mortgage .

BREAKING DOWN 'Reverse Mortgage'

A reverse mortgage provides income that people can tap into for their retirement. The advantage of a reverse mortgage is that the borrower's credit is not relevant, and is often unchecked, because the borrower does not need to make any payments. Because the home serves as collateral, it must be sold in order to repay the mortgage when the borrower dies (in some cases, the heirs have the option of repaying the mortgage without selling the home ). These types of mortgages have large origination costs relative to other types of mortgages. These costs become part of the initial loan balance and accrue interest. Senior citizen borrowers with good credit should carefully analyze the options of a more traditional mortgage, such as a home equity loan, against a reverse mortgage.

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RELATED FAQS
  1. Is it a good idea to add a reverse mortgage to your retirement strategy?

    A reverse mortgage can provide a good source of retirement income for homeowners who have little or no assets outside of ... Read Full Answer >>
  2. How can a reverse mortgage help wealthy and poor retirees?

    Reverse mortgages can help both wealthy and poor retirees, as they allow seniors to borrow against their home equity, receiving ... Read Full Answer >>
  3. What are the requirements to apply for a reverse mortgage loan?

    The requirements for applying for a reverse mortgage loan can vary depending on the type of loan sought, the age of the borrower ... Read Full Answer >>
  4. What are the different types of reverse mortgages?

    The three types of reverse mortgages are single-purpose reverse mortgages, federally insured reverse mortgages and proprietary ... Read Full Answer >>
  5. What alternatives are there to a reverse mortgage?

    While a reverse mortgage is a potential way to unlock the money tied up in your home, it is not the right answer for everyone. ... Read Full Answer >>
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    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
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