When it comes to reverse mortgages, by now you’ve probably heard the following. “They don’t allow you to pass on the home to your heirs,” “You can be forced out of your home for not making payments,” “Reverse mortgages interfere with your Social Security and Medicare,” and “You shouldn’t get a reverse mortgage unless you’re desperate.” Fortunately – none of these statements are true. They are just myths. And you can get the facts on all of these and more by heading over to our Mythbusters page.
But perhaps the biggest myth around reverse mortgages is this: “With a reverse mortgage, the bank takes your home.” That’s just plain false.
With a reverse mortgage, you or your estate continue to retain control of your home’s title. As with any loan, including a conventional forward mortgage, the lender simply puts a lien on the property to ensure the loan gets repaid.
How It Works
A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage allows homeowners ages 62 and older to convert a portion of their home’s equity into cash. Unlike a traditional forward mortgage, where you are required to make regular payments toward your loan balance, you do not have to repay a reverse mortgage until after the loan becomes due (details below). And there are no monthly mortgage payments required1.
In fact, once reverse mortgage loan proceeds are used to pay off any existing liens, there are several payout options for how you can choose to receive the remaining funds. You can opt for a one-time lump sum payment, a line of credit, a monthly payout – or a combination of these methods.
And since a reverse mortgage is just a loan, you maintain full title and ownership of your home. A reverse mortgage simply requires that you meet the following loan terms:
- Live in the home as your primary residence
- Continue to pay required property taxes and homeowners insurance
- Maintain the home in good repair, according to Federal Housing Administration requirements
When the Loan Becomes Due
As mentioned previously, mortgage payments are optional on a reverse mortgage loan1. As a borrower, you have the flexibility to pay as much or as little as you’d like – as often as you want. The loan repayment process does not have to begin until the loan becomes due, once one of the following happens:
- All borrowers on the loan permanently move out of the home
- The last surviving borrower passes away, sells the home, or doesn’t live in the home for 12 consecutive months
- The borrowers fail to pay property taxes or insurance
- The borrowers let the property deteriorate beyond what is considered reasonable wear and tear – and do not correct the problems
You can decide how to repay the loan balance – including any fees and accrued interest. Many homeowners (or their heirs) opt to sell the house and use the proceeds for repayment. Another option is to repay the reverse mortgage through a conventional forward mortgage.
Non-Recourse Loan Protection
Unlike traditional forward mortgages, reverse mortgages are non-recourse loans. This means your heirs will never owe more than the current value of the home, regardless of how much has been borrowed against it. Should the property value decrease, you or your heirs can still use up to the original loan amount, even if it exceeds the home’s updated current value. When the loan becomes due, it must be paid off with another source of funds. In this case, you or your heirs arrange for another method of financing, pay off the loan, and keep the house in the family. And in the event the loan becomes due and payable, your estate can either refinance the reverse mortgage as a standard ‘forward’ mortgage or pay the lesser of the loan balance or 95% of the home’s appraised value.
“So, what exactly does this all mean for my heirs?”
Since a reverse mortgage works by borrowing money against the value of your home, while accruing loan interest and mortgage insurance premiums, the total loan balance increases over time. If you plan to leave your house to your heirs as an inheritance, they will be responsible for repaying the loan balance – again, this is most often done by simply selling the home and using the proceeds. If your heirs do not wish to sell the home, they could pay off the loan using other sources of funds. And since the home may appreciate in value – it’s possible that there may be money left over from the sale of the house that would go to your heirs upon loan repayment. Learn more on what a reverse mortgage means to your heirs, here.
So, there you have it – the facts on reverse mortgages. By tapping into your home equity, you’ll be able to access an additional source of cash flow for what matters most to you, all while staying in your home and maintaining full ownership. Sound like a win-win? For more information on reverse mortgages, check out our blogs on occupancy requirements and property requirements.
At Longbridge Financial, we know that a reverse mortgage is a big financial decision. That’s why we’re committed to recommending the reverse mortgage program only after we make certain the program is right for you and meets your needs. We’ll get to know you, your goals, your home, and your finances as we discuss your options. And you can rest assured that if we ever feel like a reverse mortgage loan is NOT the best option for you, we will tell you so. Not all lenders make that pledge.
1As with any mortgage, the borrower must keep current with property taxes, insurance, and maintenance.