What is a reverse mortgage and how does it work?

DENVER – Retirees often rely on savings, investments and Social Security to get by during the later years of life, but there’s another option that can help: The reverse mortgage.

A reverse mortgage is a particular kind of loan, backed by the Federal Housing Authority, that allows homeowners who are 62 or older to convert a portion of their home’s equity – the value of the home minus any outstanding debt on the property – into cash.

Unlike other types of home equity loans, you don’t have to make monthly payments on a reverse mortgage. The loan usually doesn’t become due until you die, sell the home, or move out.

“It’s a lot more flexible,” says Chad Roberts of VIP Mortgage, a local expert on reverse mortgages. He says tapping into home equity opens up all kinds of opportunities to those living on fixed incomes who may be worried about making ends meet.

“Equity is really dead money,” Roberts said. “It doesn’t do anything.”

With the extra cash from a reverse mortgage, many people make improvements to their homes, pay off an existing mortgage, prolong the life of their investments or pay for various medical expenses.

“A lot of folks utilize their home equity to put into place long-term care plans,” Roberts said.

The available equity becomes a line of credit that lasts for life and increases every year, regardless of home value or market conditions, but you’ll never owe more than what your home is worth.

If you or your family sells the home to pay off the reverse mortgage, you’ll only have to pay the sales price of your home and FHA insurance will cover any potential shortfall.

Finding a reverse mortgage lender

Because reverse mortgages can be complicated and people’s needs differ, Roberts said it’s important to do your research when looking for a lender.

“It’s a little different than your typical 30-year fixed,” he said.

Roberts suggests looking for someone who is local, so they can meet with you in person to go over the details and answer any questions you have. It’s also important to find someone with a lot of experience, since some aspects of reverse mortgages have changed over the years.

The U.S. Department of Housing and Urban Development has a list of Federal Housing Authority-approved reverse mortgage lenders on its website here.

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