Reverse Mortgages: True and False

Reverse mortgages are loans.  Since they operate with the lender paying the borrower, and equity decreases over time while the principal increases, they can get a little confusing.  I thought it might be helpful to review what’s true and what’s false when it comes to a reverse mortgage.

“The bank owns your house.” — FALSE

Reverse mortgages are loans.  Sometimes it’s helpful to think of a traditional “forward” mortgage to learn about a reverse mortgage. Just like with a traditional “forward” mortgage, there isn’t any transfer of ownership or title.  

“When I pass away and the loan becomes due and payable, the bank can go after my heirs to repay the loan.” — FALSE

Reverse loans are non-recourse loans.  This means that the bank cannot go after your heirs (or children in many cases) to repay the loan.  Ultimately, the amount owed on the loan cannot exceed the value of the house when the loan becomes due and payable.  To read more about the term “non-recourse” when it comes to reverse mortgages, please check out this link.

“The bank makes payments to me with a reverse mortgage.” — TRUE

It helps me to think about traditional “forward” mortgages to learn about reverse mortgages.  With a traditional “forward” mortgage, the borrower makes payments to the bank.  With a reverse mortgage, the bank makes payments to the borrower.  These payments can be: a lump sum, fixed payments over time (a set term or “tenure”), a line of credit, or combinations of those options.   For a more in-depth review of payment options, please check out this blog post.

“Both spouses must be 62 years of age for a reverse mortgage.” — FALSE

The most common reverse mortgage, also called a Home Equity Conversion Mortgage or HECM, requires at least one spouse to be 62 years of age.  The other spouse can be identified as a “non-borrowing spouse” to qualify for a HECM.  Another option is a jumbo reverse mortgage, which sets the minimum age requirement to qualify at 55 years young.

“I can use a reverse mortgage to make a new home purchase.” — TRUE

When it comes time to downsize, a new home purchase is very common.  Empty nesters want something that better suits their needs and also may be more manageable.  It is possible to purchase a home and get a reverse mortgage using the HECM for Purchase.  This is an efficient plan because it combines the fees in one single transaction as opposed to purchasing a home and then getting a reverse mortgage (two transactions and two sets of fees).  If you are thinking of this, you’ll need a substantial down payment on the home purchase to create the equity needed to qualify for a reverse mortgage.  This can often happen with the sale of one house to purchase another. 

There’s quite a bit of information out there.  That’s why I started this blog - to share what I’ve learned so that we can figure this out together.  I hope this information has helped clear up a few myths about reverse mortgages and provided some facts that will help with your decision.