Reverse Mortgages: Who Owns the House?

My decision to look into a reverse mortgage has really taken a lot of turns.  It’s a big financial decision, and I wanted to be sure that I evaluated my options thoroughly.  One question of mine that came up early in my research was “who owns the house: the bank or me?”.

The answer is that I would own my home.  Let’s review why that’s the case…

First, a reverse mortgage is loan.  If you’d like to read some of the basics I’ve learned about the reverse mortgage, check out this blog post [link to post #1 What is a Reverse Mortgage].  But I always like to ground myself with that fact to begin.  Since a reverse mortgage is a loan, it does not mean that the home owner transfers ownership in any way to the bank.  The equity in your home is yours (or passed to your heirs) with a reverse mortgage.

It might be helpful to think in terms of the traditional “forward” mortgage.  Perhaps you have one of these now, or you had one previously.  Many are more familiar with this type of mortgage, so let’s use that as a basis for comparison.  

A “forward” mortgage is also a loan, and the bank does not own your home with this type of loan either.  The key difference between the forward and reverse mortgage is that with a forward mortgage, your debt decreases over time and you gain more equity.  With a reverse mortgage, your debt increases over time and you lose equity.

While we are on the subject of equity, it was reassuring to me that the equity in my home with a reverse mortgage would belong to me or my children (heirs in this case).  Similarly, if the home is worth less than the amount of my loan, the bank cannot go after my children to repay the difference.  I learned this is the case because a reverse mortgage is a non-recourse loan.  You can read more about this term, and how it applies to reverse mortgages here.  

When the reverse mortgage become due and payable at the time of my passing, my children have a few options:

• Sell the home.  This option is usually the most attractive if the home can be sold for more than the loan amount.  In this case, my children could sell my home, repay the bank, and keep whatever is left over
• Keep the home.  If my children want to keep the house in the family, they can repay the loan either with cash they have available or by refinancing with a new loan
• Walk away and take no action.  This option may be attractive if the value of the home is less than the loan amount.  Again, since a reverse mortgage is a non-recourse loan, my children are not responsible for the difference.  The bank is covered by FHA insurance for HECM loans 

I wanted to understand all the aspects of a reverse mortgage to determine if it’s the right decision for me.  I hope that by sharing what I’ve learned, this can help you too, even if we don’t make the same decision.  On the topic of home ownership, whether you have a traditional forward mortgage or reverse mortgage, you own the home.