November 16, 2018

3 Reverse Mortgage Surprises

You may be interested a reverse mortgage, but you may also have a few concerns about the specifics of the loan and how it works. One of the biggest misconceptions people have is that when you get a Home Equity Conversion Mortgage (HECM), the bank takes over the ownership of your home. This is not the case, whatsoever.

If you can address all of the questions you have, making the decision as to whether a reverse mortgage is right for your situation could be made easy. You may even be quite surprised by what you find.

Here are three common reverse mortgage surprises that borrowers find when they do the research.

Surprise #1: You still own your home

Many people are surprised to hear that they still have complete ownership of their home when they take out a reverse mortgage. This comes down understanding what a reverse mortgage actually is and what it is not. In fact, for as long as the reverse mortgage product has been around, the borrower in a reverse mortgage transaction has always kept full ownership of the home.

When you take out a reverse mortgage loan, you are borrowing money from a lender based on the equity that you have from paying off your mortgage over the years. Like in other mortgages, the home serves as collateral for the loan.

A reverse mortgage is similar in many ways to a traditional mortgage. The lender does have the ability to foreclose on your home if you do not adhere to the loan terms—that includes keeping up on your payments for property taxes and homeowners insurance, as well as maintaining the home to Federal Housing Administration property standards.

Even in the case that a borrower passes away, any heirs will still inherit the home along with the mortgage as well as the remaining equity in it, if there is any.

Surprise #2: The loan is nonrecourse (you can’t owe more than the home is worth)

To fully understand a reverse mortgage loan, it is vital to understand what a non-recourse loan is.

When a loan is nonrecourse it means that the lender only has your property as security. The lender has no other way to obtain repayment of the principal and interest if something were to happen that prevents you from paying off the loan come repayment time.

This also means that once you decide to sell your home or your heirs sell it, if there is more due on the loan than the house is worth, neither you nor your heirs will be responsible to pay more than the home value at the time of sale.

If the loan balance does exceed the home value, the remaining amount due will be covered by the Federal Housing Administration (FHA) insurance you’ve been paying for while you’ve had the loan.

Often borrowers have a misunderstanding about this important loan feature. Remember, you will not have to repay more than your home is worth, regardless of the balance of the loan.

Surprise #3: You can make payments

One of the great aspects of a reverse mortgage if you don’t have to make payments toward the principal or interest on the loan until you have moved from the home or pass away. But while you’re not required to make mortgage payments, you may still choose to make those payments and pay down the loan while you are living in the home.

One way you can do this is to pay the interest on the loan to limit the balance from growing. Typically, reverse mortgage interest will add up over time. But, by making a monthly payment toward the interest charges every month, you may be able to reduce your monthly expenses, enjoy the benefits of a reverse mortgage, and keep the balance low.

You also have the option of paying toward the principal on the loan. By paying toward a combination of both interest and principal, if you are in the financial situation to do so, you may save money as well as keep more equity available to utilize in case you need to tap into it for future financial needs.

If you still have questions on how a reverse mortgage works and would like to clear up some of your concerns, contact us for more information. You may be surprised.