How Do “reverse mortgages” work?
In: Economics
They are essentially buying your house over time. A price is agreed upon, and they pay monthly installments towards buying it, but you still get to live there. It’s generally a way for retired people to be able to live off their home equity. After you die, they own the house.
The lender is generally assuming that they can get you to agree upon a value for the house that is less than its actual value, or that by the time they own the house they will be able to sell it at a profit.
It can be a good deal for both parties. People who don’t want to sell their house to get value out of it before they die can have money to live on, and the lender eventually makes money off the deal.
But there are some catches that can make such deals iffy. What happens if you die before they have paid the full value agreed upon? (The difference should go to your heirs.) What happens if the lender pays off the house before you die…do you get to keep living there? Do the payments stop? Who pays for things like insurance and house maintenance?
Like any important financial decision, the devil is in the details.
First, they can only be sold to the elderly.
Second, a company buys your house from you for an amount that’s based on their estimate of when you will die.
Third, Instead of giving you all of the money up front, they pay you an amount every month based on the purchase price. This gives you extra money to live on, while you get to keep a place to live.
Fourth: when you die, the mortgage company gets your house.
It’s a variation on a home equity loan. You borrow money against the value of your home and pay it back when you sell the house.
Some elderly person owns a house but needs cash for living expenses… so they get a “reverse mortgage”, and each month they get a check. That amount plus interest is to be paid upon person’s death or sale of home to the lender.
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