The Basics of Reverse Mortgages

The common characteristics of all reverse mortgages are relating to homeownership, loan advances, loan cost financing, loan balances, repayment, and debt limits. Here are the basics of reverse mortgages:

A. The senior citizens retain the title to their home.

The lender does not own the home, and does not automatically "get" the home when the borrower dies. So if your kids are against you getting a reverse mortgage tell them that they can extend you a non-recourse loan now and there won't be a reverse mortgage loan, or they can pay off the balance and keep the home when you die. Or, your executor can pay off your home with other assets of your estate.

However, during the life of the loan the borrower is still responsible for taxes, insurance, and upkeep. That's important to remember.

The borrower’s estate or heirs must pay off the loan upon the borrower’s death or it will belong to the lender.

B. About the amount of the loan.
The amount of the loan advances generally depends on the value of the home, the age of the borrower, and the cost of the loan (that is, the loan fees and interest rate).

The greatest amounts are generally available to the oldest borrowers with the most valuable homes who take loans that have the lowest costs.

C. It does cost to get a reverse mortgage. However...
The fees involved in getting the loan fees can generally be "financed," that is, added to the loan balance at loan closing. This means, in effect, that some or all of the cost of setting up the loan (closing costs, origination fee, insurance premium) can be paid with an extra loan advance at closing.

D. The loan balance (amount owed) rises over time. It grows because the borrower keeps getting loan advances and being charged interest on the outstanding balance while making no repayment until a future time.

E. No repayment is required on most reverse mortgages for as long as the borrower lives in the home as a principal residence. When the last surviving borrower dies, sells the home, or permanently moves away, then the full loan balance becomes due and payable.

F. There is a "non-recourse" limit on the borrower’s repayment obligation. This important consumer safeguard means that the total amount owed by the borrower can never exceed the value of the home at the time the loan becomes due and payable. In seeking repayment, the lender does not have recourse to anything other than the home’s value.

1) Even if the loan balance grows to be greater than the home’s future value, what the borrower owes is limited by the value of the home.

2) The non-recourse feature protects the borrower and the borrower’s estate and heirs from "deficiency judgments," that is, from being required to pay back more than the home’s value.