A reverse mortgage is a type of mortgage loan in which the bank pays a monthly amount to the customer in exchange for the latter offering his or her house as a guarantee. In very broad terms, it works in the opposite way to a normal mortgage.
Generally, this type of financial product is particularly aimed at customers over 65 - although depending on the banking institution, this age can be 70 - who already own a house. Unlike traditional mortgages, the customer who takes out the reverse mortgage does not have to pay back the loaned capital, and it is his or her successors that pay the cost. In exchange for mortgaging his or her house, the holder will receive a monthly amount that can be temporary, for life or a single payment, according to what has been contracted.
With temporary reverse mortgages, a monthly amount is paid over the fixed term of the contract. The total amount received will be the equivalent to the value of the property, which is why this type of mortgage has a higher monthly payment than the life annuity modality, as its duration is limited. However, once the value of the property has been covered, the money is no longer paid. With reverse mortgages, payments are not subject to Personal Income Tax.
In addition, life annuity reverse mortgages guarantee a monthly income over the lifetime of the mortgage holder. Due to the lack of maturity date, the monthly payment received is less than that of temporary reverse mortgages. Moreover, this type of loan can also have life annuity payment insurance, which would be activated at the time at which the payments received exceed the maximum value of the mortgage.
If a single payment reverse mortgage is taken out, a single payment will be received based on the valuation of the property at the start of the mortgage.
It is important to highlight that once the value of the property has been paid through monthly payments, use of the property will not be lost. Furthermore, there may be more than one holder of the mortgage, and thus it will only expire - if it is a life annuity or if the time frame agreed upon has not elapsed - when both holders die.
As for repaying the mortgage loan, the payment will be borne by successors, who must decide whether they want to sell the property and pay off the rest of the debt, pay the debt with their own funds or, if they are unable to do this, take out a new mortgage to pay the outstanding debt.
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