Reverse Mortgage 101Reverse Mortgage Basics

By: Mark Schow, 

President, Reverse My Mortgage.

Updated June 6, 2011

To start, let’s cover the basics and history of a reverse mortgage. The term came from early products in the 1980’s where the reverse mortgage lender made payments to the borrower rather than the borrower making payments to the reverse mortgage bank. As a result the product was named the “reverse mortgage”. These reverse mortgages often had significant downsides. Once the borrowers passed away the home became the property of the bank who lent the money, and at times terms applied where the borrower could be displaced from the home if they lived too long. Interest rates were typically adjustable with no fixed rate options available. Closing costs were often very high as well. In the 1990’s FHA, seeing great potential for the product, got involved and new rules were implemented via the HECM reverse mortgage program allowing the borrower to pass on the home equity to their heirs, a guarantee to never be displaced from the home regardless of how long they lived, protection from home value volatility and much more. As a result, today’s reverse mortgages are a great option with very few drawbacks.

So how does the reverse mortgage work? A reverse mortgage (also referred to as reversible mortgage) is similar to a standard mortgage in that it is a loan that is secured by real property, namely the home. The big difference is that there are no mortgage payment requirements on the mortgage. How is this accomplished? The reverse mortgage loan requires that you have equity in your home and that you are at least 62 years old. As a result a calculation is made to determine the amount of equity that can be lent by looking at the age of the borrower, the interest rate charged and the location of the home. This tells FHA and the lender how much they can safely lend without ever collecting a mortgage payment. As a result the lender can lend with minimal risk, but must wait to make their interest until the homeowner either chooses to move or passes away. Foreclosing is rarely an issue- only in cases where the homeowner does not follow the terms of the loan such as not living in the home, not keeping the condition of the home to reasonable standards or not paying the property taxes and homeowners insurance. This makes a loan that is very appealing to the lender who simply wants to earn interest on a low risk loan, and offers financial freedom to the borrower trying to figure out their retirement planning.

So where does FHA come into play? FHA had an impact on the reverse mortgage industry when it started insuring the lenders against losses in exchange for certain benefits to the homeowner. This helped reduce interest rates and eliminated most of the big drawbacks of doing a reverse mortgage. If the lender issues an FHA reverse mortgage they are insured against losses should the balance of the mortgage be higher than the value of the home when the homeowner’s passes away. Further, the same FHA insurance leaves the borrower the ability to leave the home equity to their heirs- and in most cases there is equity left for the heirs. Today’s FHA insured reverse mortgages are referred to as HECM loans, or home equity conversion mortgage. 

When considering reverse mortgage pros and cons, the benefits include the ability to live in the home payment free, to receive money from the reverse mortgage to do home improvements, pay off debts or other mortgages, get protection from housing volatility, and get funds that are non taxable. Money received from a reverse mortgage is not taxed because it is not income, it is in fact loan proceeds just as getting cash from a mortgage refinance. The money does not affect Medicare or Social Security income as a result, but can have an impact on Medicaid for those receiving that assistance. Current reverse mortgage have many option types available, including fixed rate options, equity lines where you use money only as needed much like using a credit card- but without any payment requirements, and options for having monthly payments sent to you, or having a lump sum of cash given to you at the loan settlement. 

Because of the issues from the past, reverse mortgage myths are prevalent, and are often spread by financial consultants, radio personalities, close friends and relatives and even mortgage professionals who are not experts on reverse mortgages. We have included a full section on reverse mortgage myths to help clarify these myths and what the real facts are. 

The myths include, but are not limited to the following beliefs:

• ·         The bank will own the home when I pass away or move.

• ·         My kids will not inherit the home equity.

• ·         I cannot purchase a home with a reverse mortgage

• ·         Reverse Mortgages are all adjustable rates.

• ·         My kids will have to pay the lender if the mortgage balance is higher than the home value when I pass away.

• ·         I cannot do a reverse mortgage if I currently have a mortgage on my home.

• ·         Closing costs are extremely high

• ·         I will be forced to move from my home if I live too long.

There are many benefits to reverse mortgages, and a few drawbacks. We encourage you to get complete information from our reverse mortgage guide or talking to a professional reverse mortgage adviser prior to making a decision on getting a reverse mortgage.  You may also use our reverse mortgage calculator for quick results on how much you qualify for. You can get a free, no obligation quote and get all the facts so you can make your choice with confidence. You can always call us for complete information toll free at 855-473-8377. Reverse My Mortgage guarantees the best mortgage loans to its clients, so you can rest assured you will get the best information, service, and reverse mortgage. Our commitment is that we won't push one reverse mortgage product over another, but will advise you according to your circumstance.