Reverse Mortgage

• A reverse mortgage is a debt in which the lender pays the borrower, as opposed to the traditional method of the borrower paying the lender. The borrower cashes in the built-up equity in her home for income. The lender either gives the borrower a line of credit, a lump sum or a monthly payment of the balance of the mortgage. Interest and closing costs are taken from the equity of the home.
  
  

Sale of the Home

• At the sale of the residence, due to a move or death, the mortgage company is paid the balance of the equity plus interest and fees given to the borrower. Any remaining equity in the home is paid to the homeowner or the estate of the deceased. Contrary to popular belief, the lender does not receive the home at the death of the borrower. It simply receives the amount due to it through the proceeds of the sale. However, due to the interest and fees due, this may eat up a nice chunk of the proceeds from the sale of the home.
  
  

Benefits

• To the homeowner, the benefit is simply another form of income in his retirement years. Oftentimes, if there is still a traditional mortgage on the home, the reverse mortgage in essence pays off the debt and removes the burden of monthly payments from the borrower. Additionally, it allows the borrower to reap the benefits of years' worth of payments into the home prior to selling it as well.
  
  

Drawbacks

• Reverse mortgages have higher closing costs than traditional mortgages. A traditional mortgage typically has closing costs of 3 percent while a reverse mortgage’s closing costs range from 6 to 10 percent. Also, the amount the borrower can receive varies based upon her age. The older a borrower, the more funds she can receive from the equity on the home, which means that a borrower who just meets the minimum age requirement of 65 receives a significantly smaller portion of her equity in a reverse mortgage than a 90 year old.