How Do Reverse Mortgages Work?

One of the challenges that seniors face is finance due to their retirement and lack of access to regular income. Although there are many financial tools they can use, it is only a reverse mortgage that is convenient and designed to make life easy and enable them to secure the future.

The common knowledge about mortgages is that a person borrows money from a lender, purchases a home, makes monthly payments to offset the balance (principal and interest), and gradually builds the equity in the home. After some time, the debt decreases and the home equity grows, and when the mortgage is fully repaid, the home has full equity, and the borrower has outright ownership of the home.

Reverse mortgages work in a different way. Instead of the borrower making monthly payments to the lender, the lender makes payments to the borrower, depending on a percentage of the equity in the home. You can decide to have the cash paid as a single lump sum, regular monthly payments, a line of credit, or a mixture of these modes.

While the reverse mortgages last, borrowers retain the titles to the homes that serve as collaterals for the loans. Interest is chargeable only on the proceeds received. However, as the loan increases, the debt also increases, and the equity in the home reduces.

The proceeds from the reverse mortgage are not taxable and can be used as the borrower wishes. However, if any mortgage is due on the home, it must first be repaid before spending the remaining fund.

When you relocate from the home, sell the house, or pass on, the lender sells the home to get back the money paid out to you. Having fully paid the lender’s fees, any equity left in the home is given to you or your heirs. Meanwhile, if you get more money than the value of your home (if you live longer than the loan), you will not be required to pay the outstanding because the Federal Trade Commission stipulates that you will never owe more than the value of your home.

It should be noted, however, that reverse mortgages become due if the borrower fails to meet the requirements of the mortgage such as failure to pay taxes and or insurance, or if the home is not adequately repaired. In essence, you are required by the law to pay property taxes and insurance and ensure proper maintenance of your home to prevent it from falling into disrepair.

In summary, reverse mortgages cannot increase to a value more than the appraised value of the home. Besides, the lender cannot demand repayment of the loan other than the value of the house; therefore, your other assets are protected. You are not to repay reverse mortgages (principal and interest) until you sell the home, move out of the home permanently, or pass away. Before then, you are not to pay anything on the loan. And if the total amount of payments received from the lender is greater than the amount obtained from the sale of the home, the lender cannot require you or your heirs to offset the deficiency.

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The services referred to herein are not available to persons located outside the state of California.
Borrower is responsible for property taxes, homeowners insurance, and property maintenance. A HECM is a home-secured debt payable upon default or a maturity event. Some restrictions apply. This material has not been reviewed, approved, or issued by HUD, FHA, or any government agency.