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December 24, 2007

Reverse mortgages

There’s a type of mortgage that pays the homeowner and allows the homeowner to stay in the home while someone else slowly buys it. Just how does this type of mortgage work, and who is it right for? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, these are called reverse mortgages. These are mortgages not like the kind we typically think of, where you take out a mortgage to buy a house. These are mortgages used by people who already own their home, and, in fact, they own their home free and clear of a normal mortgage. So you are usually talking about some older person. They want to stay in the house but perhaps they are short on money. So what they would like to do is slowly use the equity in their home. And so what they do is they contract with a financial institution to actually sell the home to that institution. However, instead of in the typical case where you sell, get the money and move out, here you stay in the house and the institution slowly pays you a monthly amount. Now these can be set up to expire in a certain period of time, when the owner would have to move out. Or they can be set up to last as long as the owner lives. And then when either the owner leaves or passes on, the house gets turned over to the financial institution. They take possession of it and use it as they wish. Now what the owner, of course, gives up here is the right to will the house to one of their descendants, but this is a great plan. It's becoming more and more popular for folks who live in a home free and clear of a mortgage and need to have some additional cash."

Posted by Dave at December 24, 2007 08:00 AM