The Situation:
- Borrower: Bob, age 75
- Home Value: $400,000
- Current Mortgage: $0 (his home is paid off)
- Needs: Bob lives on a fixed income and wants extra cash to help with living expenses and medical bills.
How It Works:
Based on his age and home value, the bank determines Bob’s principal limit is $200,000. He doesn’t just get a giant bag of cash all at once; he has several payout options.
Bob decides to take a combination:
1. Lump Sum: He takes $40,000 right away to repair his roof and consolidate some credit card debt.
2. Line of Credit: He puts the remaining $200,000 into a line of credit that he can draw from when he has emergency expenses.
3. What Happens Next? Bob lives in the home for the next 12 years. He never makes a monthly payment on the $40,000 he borrowed. However, the bank charges interest and fees on the money he withdrew, adding those charges to his balance. Over those 12 years, Bob’s loan balance grew to $90,000.
Repayment:
At age 87, Bob moves into an assisted living facility. Because he no longer lives in the home, the reverse mortgage comes due.
- Bob (or his heirs) sells the home for $500,000.
- The bank has paid off the $90,000 he owes plus accrued interest.
- Bob gets to keep the remaining $410,000 in equity for himself.
Important Considerations
- You still owe the basics: Even though you don’t have a mortgage payment, you must still pay your property taxes, homeowners’ insurance, Home Owners Association Dues (if any) and keep the home properly maintained. If you fail to do this, the lender can foreclose on the home.
- Loan balances grow: Because you don’t make monthly payments, the interest compounds and the total amount you owe increases over time.