What is reverse mortgage?

Rahul Sharma (----------) (8187 Points)

23 October 2012  

What is Reverse Mortgage?

When you buy a house, you get the loans and property will be deposited as the security for the loans. When you repay the entire loan the house will be given to you and you become the owner of the house. In the reverse mortgage, you have already own a house without any loans on it, you will get the some money to run your rest of the life giving your house to the banker as the security.

For example, if  X retires from his job and he doesn’t have much savings in his bank account except few lacs on his PF account. He expected a monthly expenses of Rs.25000 and he will not be able to get income above Rs.15000 per month. But, he has the house worth Rs.4500000. He can apply for the reverse mortgage loan and receive the money from bank for his expenses. It will be certain period or till his death. He will be allowed to stay in his house till he dies and his spouse also can stay in the same house for entire life. After the death, the bank will give their heirs two options — settle the overall outstanding loan and retain the house or the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs.

The bank bears the risk that the outstanding will exceed the market value of property then and will not ask for the difference from the heirs.