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.

INVESTOPEDIA EXPLAINS '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 be a great way to increase retirement income. Does it work for everyone? What happens after a homeowner ...
  2. How can a reverse mortgage help wealthy and poor retirees?

    Learn about the ways a reverse mortgage can help both wealthy and poor retirees by allowing them to borrow against their ...
  3. What are the requirements to apply for a reverse mortgage loan?

    For homeowners of a certain age who wish to stay in their homes but are finding it costly, a reverse mortgage could be the ...
  4. What are the different types of reverse mortgages?

    Discover the three different types of reverse mortgages available to homeowners aged 62 and older and the key similarities ...
  5. What alternatives are there to a reverse mortgage?

    Unlock the money tied up in your home with alternatives to a reverse mortgage, such as downsizing, selling your home or refinancing.
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