Reverse Mortgages: What Does Non-Recourse Mean?

There are a lot of terms that have come up with my review of a reverse mortgage.  One in particular caught my attention, so I wanted to share what I’ve learned.  The term “non-recourse” has been attached to “reverse mortgage”, so I needed to know more about what this meant, and how it applied to the reverse mortgage.  

If you’ve been reading along with my journey to learn more about a reverse mortgage, you’ve come to know a few things about me.  I’m 65 years old, retired, and living in a beach community with my wife.  We own our home outright, but we are considering a reverse mortgage to increase our monthly cash flow.  I started this blog to share what I’ve learned so that hopefully we can learn about a reverse mortgage together.  There’s a lot to learn!

Let’s learn about the term “non-recourse loan” and how it relates to a reverse mortgage.  Non-recourse reverse mortgages mean that I can never owe more than the value of my home when the loan becomes due and payable.  The same would apply to my children (heirs) when I pass away.  

I wanted to get an understanding of how it applied to my situation, so I ran some numbers on my home.  It’s currently worth about $700,000.  Let’s say that I got a reverse mortgage with a loan amount of $450,000.  In 25 years (I’m in good health and am hopeful!), the loan amount could be well over $1,200,000 because with a reverse mortgage debt increases over time and home equity decreases.  The debt increases because the bank is paying me with a reverse mortgage, and the interest is working against an ever growing balance as I receive payments.

This is where things get interesting.  Let’s say that in 25 years, the reverse mortgage becomes due and payable at the time of my passing.  What if the loan amount is $1,200,000 and my home is only worth $900,000?  Or the housing market does some crazy things (we’ve all seen that), and my home value stayed at $700,000.  

Since the reverse mortgage is a non-recourse loan, and I can never owe more than the value of my home at the time the loan becomes due and payable, if the loan balance is $1,200,000 and the value of the home is $900,000, then $900,000 is the maximum amount owed to the bank.  If the home is worth $700,000 at that time, then $700,000 is the maximum amount owed to the bank.  

I’ve mentioned that my children are my heirs, and I’m leaving my house to them.  They have a decision to make when I pass away when it comes to the house.  Typically, it comes down to the loan amount vs. the home value to determine the best choice.

1. Sell the house and keep whatever is left after paying the loan balance
2. Keep the house and pay the loan balance (through available cash or refinancing)
3. Walk away and let the bank sell the house

The non-recourse protection is a very valuable aspect of the reverse mortgage.  I’ve found that it puts me at ease knowing that if my loan amount outpaces the appreciation (or depreciation) of my home, the bank cannot demand more than the value of my house when the loan becomes due and payable.  Ultimately, this would impact my children more than me, but it’s certainly helpful to understand how it works, and what the term “non-recourse” means when it comes to reverse mortgages.