A reverse mortgage, or home equity conversion mortgage (HECM), is a special kind of loan that allows homeowners 62+ to access the equity in their home and stop paying their monthly mortgage payments (if they haven’t already).
The loan becomes due when the homeowner dies or leaves the property.
In a reverse mortgage your house secures the money you get and the value of your house determines the amount of money you will receive per month. In determining your monthly payout, lenders typically factor in 4% annual appreciation.
The actual appreciation (or depreciation) of your home will determine your options in the future.
If your house appreciates more than the forecasted 4%, you may be able to pay off the balance of your reverse mortgage and get a second for a higher monthly payout. If your house depreciates or stays level, you will most likely continue to receive the same monthly payments.
How does this make any sense?
These days a 62-year-old is very possibly looking at many more years of life. What if the house doesn’t appreciate and the monthly payments pile up so that you owe more than the house is worth. What’s the endgame?
Example: Let’s say Bill is 62 and his house is worth $250,000. The reverse mortgage lender he deals with calculates a $602 monthly payout. His house doesn’t appreciate at all. Factoring the interest rate the loan will surpass the value of the house around when he is 80.
When Bill dies at 85, his loan exceeds the value of his house. In other words, the house is underwater. Who pays up?
Well the answer is no one has to pay up. Since reverse mortgages are insured by the Federal Housing Administration (FHA), the house goes into foreclosure and the FHA absorbs the debt. The homeowner’s heirs are not responsible.
The Fate of the Home in Other Scenarios
- Let’s say the heirs of the above example DO want to retain the home. HUD offers an option in these situations where they can get around the debt. For underwater houses, HUD will allow heirs to cancel the debt by paying 95% of HUD’s appraisal of the house regardless of what is remaining on the debt.
- If the borrower leaves a non-borrowing spouse, there are several stipulations that will allow the bereaved to remain in the house indefinitely while still collecting the reverse mortgage payments. This can happen provided that at the time of the reverse mortgage the non-borrowing spouse was under 62 and married to the borrower, and remained married until the death of the borrower.
- If the house value far exceeds the reverse mortgage loan balance, and the heirs do not want the house, they can sell the house to pay off the balance and keep the remaining money. If they DO want the house, they have up to one year to pay off the loan balance and thereby retain the house.
- If the homeowner has a change of heart and wants to leave the house, they can sell the house to pay off the reverse mortgage balance and keep the remaining money. Additionally, if a homeowner comes into money somehow and wants to be free of the debt, they can pay off the balance and close the reverse mortgage.
Are you 62 years or older? Do you own your house? Our advertising partner American Advisors Group (AAG) wants to give you a free information kit on reverse mortgages.