How does Reverse Mortgage Work?

John and Mary are married with three adult children. They own their home, which is worth $425,000 and in good condition. They have an existing mortgage with a remaining balance of $60,000.

John and Mary decide they would like to make a few repairs on their home and do some traveling. Since they are over the age of 62 and have substantial equity in their home they qualify for a $306,000 credit limit.

Costs for reverse mortgage products include an origination fee and closing costs, as well as a monthly service fee and possibly mortgage insurance. For John and Mary, most of these can be financed in the loan, so they will have minimal out of pocket expenses.

The lender then pays off their $60,000 mortgage and $20,000 origination fee. The rest is left for them to use as they wish.

John passes away after 10 years, but Mary continues to live in the home without having to repay the balance. Five years later, Mary passes away, 15 years after originally obtaining the loan. The balance, principal plus interest, is now $733,000 (assuming no draws after origination). John and Mary’s children sell the home.

Scenario 1 – Home value appreciates

The home has appreciated and is now appraised at $765,500. John and Mary’s children pay the reverse mortgage lender $733,000. The children receive the remaining $32,500 ($765,000 minus $733,000), less the costs incurred through the sale of the property.

Scenario 2 – Home value depreciates

An appraiser estimates the home’s market value at $425,000. John and Mary’s children sell the home for $425,000 and pay off the loan and nothing more is due.