Money Talks, So Should You

Q&A: How does a reverse mortgage work?

Deborah Frazier
by Deborah Frazier, NAPFA

A reverse mortgage is for those senior citizens over age 62. (Of course, I am over 62 and certainly don’t feel “senior.”)  Do not be mistaken, this is a loan on the equity of your house. It does not need to be paid back until the last survivor has passed away. The loan must be paid back within 12 months of the when the home is no longer the primary residence.

The factors used to calculate the monthly income are: age of homeowner, interest rate, equity in the home and a promise to keep taxes and insurance current.

READ: What are the eligibility requirements for a reverse mortgage?

If, when the last resident dies, you have more equity that the balance of the loan, the estate keeps the difference. On the other hand, if the loan balance is higher than the value of the home, the bank suffers the loss.

In my practice, a reverse mortgage is a last resort if a client’s money runs out. The fees are fairly steep — up to 2 percent at closing and then all of the normal fees associated with buying a home. Interest rates can be from 3-5 percent, but since you are not paying the interest back, the loan grows until the home is sold.


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Deborah Frazier has been a fee-only financial adviser since 1986. Frazier is a member of the National Association of Personal Finance Advisors (NAPFA), a fee-only professional association and a Dimespring knowledge partner.