Understanding Reverse Mortgages

One of the most popular ways for senior citizens to get cash immediately is to apply for a reverse mortgage. Although reverse mortgages aren't for everyone, they can get senior citizens out of a bind. A reverse mortgage -- sometimes known as a conversion mortgage -- is different from a regular mortgage in that the home is used for collateral against the loan.

What is a reverse mortgage?

In a reverse mortgage, the sale of the property is used to pay off the loan, as well as the interest. The owner of the property can get cash now from the lender and won't have to pay off the loan until he or she sells the house. Sometimes, reverse mortgage loans are paid off during the borrower's lifetime, but more often, the property is sold following his or her death and the estate pays back the loan.

Unlike with other types of mortgages, the lender cannot go after the borrowers other assets if the home sells for less than the borrowed amount. This protects people who take out reverse mortgages from losing everything and ensures that the borrower cannot be left homeless should something happen.

What are some of the advantages of a reverse mortgage?

In some cases, the advantages of obtaining a reverse mortgage are greater than the disadvantages. For one, a reverse mortgage allows the borrower to remain on the property regardless of the depreciating value of the home. For example, if a borrower took out a $100,000 reverse mortgage, he could live on the property until he dies or he can decide to sell it at any point in time. And even if the house value depreciates to $70,000, he cannot be penalized. This allows senior citizens to live without fear of losing their home.

What are some of the disadvantages of a reverse mortgage?