Reverse Mortgage Basics
A reverse mortgage is a loan in which a borrower pays LESS than the interest only payment on the mortgage, thereby
actually increasing the loan amount that they owe to the bank or lender. At first glance, it may seem like this is a
very risky or foolhardy step for a borrower. However, for many older individuals who have lots of equity in their
homes but they are on a fixed income, a reverse mortgage makes a lot of sense as they keep more of their monthly
income. As well, for anyone who anticipates a couple of lean years in their revenue, a reverse mortgage may be a
good temporary option to keep ahold of needed disposable income until the revenue increases and the strain to make
the mortgage loan payments lessens.
Reverse Mortgages Explained
With a standard mortgage loan, the borrower makes monthly payments that cover the interest portion of the mortgage, along
with a small payment towards the principal portion of the mortgage (over time the principal payment increases as the
interest payment decreases). Typically a mortgage is amortized over 30 years, after which the home is owned free and
clear by the borrower. A reverse mortgage is structured such that after each monthly payment the borrower loses a
small portion of their equity in the house. Reverse mortgages are usually done on a fairly short term basis,
anywhere from 6 months to a few years. In a good housing market, the borrower can lose relatively little equity in
their home because even though their payment is not covering even the interest on the loan, their home's value is on
the rise. In the United States, a reverse mortgage can only be on the first mortgage or lien, and cannot be applied
to a second mortgage (cmmonly referred to as a home equity loan).
Always speak with a financial professional or mortgage banker before you apply for any type of loan.
