Reverse Mortgage Facts

Many communities are seeing an increase in the use of reverse mortgages by their owners. Alternatively, as older owners are passing on, communities are facing situations with reverse mortgages coming into play for those properties.

A reverse mortgage is a loan against one’s home or condominium unit that requires no repayment for as long as at least one of the borrowers is residing at the property. It is called a “reverse” mortgage because it is essentially the opposite of a traditional mortgage. Instead of making payments to a lender, the borrower can choose to either receive periodic payments or take a single disbursal of the loan amount. The monthly payments made to pay off a traditional mortgage generally would decrease the debt and increase the equity of the borrower in the property. The payments received with a reverse mortgage have exactly the opposite effect in that they increase the debt and decrease equity in the property.

A reverse mortgage loan is based on the equity existing in the property at the time of the loan. The maximum loan amount for a reverse mortgage is principally based on several factors, including the age of the youngest borrower, the value and location of the property, and the current interest rate.

To be eligible, all owners listed on the title to the property must be at least 62 years of age and occupy the home as their principal residence for the majority of the year (i.e. more than half the year). If there is any other debt against the property (such as a traditional mortgage), that amount must be paid off before receiving the reverse mortgage (or with all or a portion of the proceeds from the reverse mortgage). This means that the reverse mortgage must be in first position. If the borrower cannot pay off the existing debt before receiving the reverse mortgage proceeds, or if the property does not qualify for a large enough immediate cash advance from the reverse mortgage to pay off the existing debt, the property would not qualify for a reverse mortgage.

A reverse mortgage is paid to the borrower(s) as either (1) an immediate cash advance at closing (i.e. a lump sum of cash paid on the first day of the loan; (2) a monthly cash advance for a set period of time; or, (3) a line of credit account that allows the borrower to take cash advances whenever he or she chooses until the maximum amount is used. There may also be various combinations of these options, depending on the specific lender.

A reverse mortgage is paid back to the lender when the last surviving borrower (a) passes away; (b) sells the home; or, (c) permanently moves away (“permanently” generally means the party has not lived at the property for 12 months in a row). Additionally, the loan may also have to be paid back if the borrower(s) fails to pay property taxes, keep the homeowner’s insurance current, or allows the property go to “waste” or substantial disrepair.

In repaying the reverse mortgage, the total owed equals all the cash advances the borrower(s) received, plus all the interest on them, up to the value of the home at the time the loan is repaid. A borrower can never owe more than the value of the home at the time the loan is repaid.

The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM) loan. The HECM loan is the only reverse mortgage insured by the Federal Government, through the Federal Housing Administration (FHA). This program ensures that the borrower will receive all payments due under the terms of the loan and also ensures that the lender will receive full repayment of the loan balance, even if it exceeds the value of the property. In addition, under the terms of an HECM loan, neither the borrower, his or her heirs, nor his or her estate will ever owe more than the loan balance or the value of the property (whichever is lower) and no assets other than the property must be used to repay the debt. This is because the FHA insurance covers any further financial obligation to the lender.

The foregoing is a brief overview of reverse mortgages. If additional information is needed, please contact an attorney with the Firm.