Reverse Mortgages Made Simple: What Homeowners and Families Need to Know
A reverse mortgage can sound confusing, but the basic idea is actually pretty simple. It is a loan that allows certain homeowners, usually age 62 or older, to use part of the equity in their home without making a traditional monthly mortgage payment.
Instead of the homeowner paying the lender every month, the loan balance grows over time and is usually paid back later when the home is sold, the homeowner moves out, or the homeowner passes away.
For many older homeowners, a reverse mortgage can provide extra cash flow, help pay bills, or allow them to stay in their home longer. But it is important to understand how it works before making a decision.
Do You Still Own Your Home?
Yes. This is one of the biggest misunderstandings about reverse mortgages.
With a reverse mortgage, you still own your home. Your name remains on title, and you are still responsible for the property.
That means you must continue to pay property taxes, keep homeowners insurance in place, maintain the home, and follow the terms of the loan.
Do You Have to Make Monthly Payments?
In most cases, you do not have to make monthly mortgage payments with a reverse mortgage.
However, this does not mean the loan is free. Interest and fees are added to the loan balance over time. The amount owed usually grows as the years go by.
The loan is typically repaid when the homeowner sells the home, moves out permanently, or passes away.
When Does a Reverse Mortgage Have to Be Paid Back?
A reverse mortgage usually becomes due when the homeowner sells the home, moves out, passes away, or does not meet the loan requirements.
The homeowner is still responsible for paying property taxes, keeping homeowners insurance active, and maintaining the property.
This is why it is so important for both the homeowner and family members to understand the loan terms before there is a major life change.
What Happens When the Homeowner Passes Away?
When the last borrower passes away, the reverse mortgage usually needs to be repaid.
In many cases, the family or heirs will sell the home, pay off the reverse mortgage, and keep any remaining equity. If the family wants to keep the home, they may need to pay off or refinance the loan.
This is where planning ahead can make a big difference. Families should know who to contact, where the loan paperwork is located, and what options may be available.
Can You Sell a Home With a Reverse Mortgage?
Yes. A home with a reverse mortgage can be sold.
The process is very similar to selling any other home, except the reverse mortgage payoff must be ordered from the lender or loan servicer. At closing, the reverse mortgage is paid off from the sale proceeds.
If there is equity left after the loan is paid, that remaining money goes to the homeowner or the estate.
Why Families Should Talk About This Early
Reverse mortgages often become stressful when families do not understand them until after a parent has passed away or needs to move into assisted living.
A simple conversation ahead of time can help avoid confusion later.
Families should know who the reverse mortgage company is, where the loan documents are, who is listed on the loan, and whether the family plans to sell the home or try to keep it.
Is a Reverse Mortgage Good or Bad?
A reverse mortgage is not automatically good or bad. It depends on the homeowner’s needs, age, finances, home equity, family plans, and long-term goals.
For some homeowners, it can be a helpful tool. For others, selling, downsizing, refinancing, or using other financial resources may be a better option.
The most important thing is to understand the details before signing anything.
Final Thoughts
Reverse mortgages can be useful, but they should be handled with care. Homeowners need to understand that they still own the home, but they also still have responsibilities.
Important Things To Do Before You Make a Decision:
- Decide how long you expect to stay in the home.
- Consult with a Housing and Urban Development (HUD)-approved reverse mortgage counselor before you apply. A counselor can help you decide whether a reverse mortgage or some alternative is the best choice for you. To find a HUD-approved Home Equity Conversion Mortgage (HECM) counselor near you, call (800) 569-4287.
- Decide if you really need a reverse mortgage. Another type of loan may be a less costly solution. Discuss this with a counselor
- Include trusted family members in the decision-making process. If inheritance is an issue, adult children may be willing to help.
- Shop around and compare offerings. Not all reverse mortgages are the same; their terms vary substantially.
- Determine if a reverse mortgage will affect your ability for “needs-based” public assistance benefits.
- Review your mortgage broker’s license record. Call DRE for clarification on any discipline taken.
CAUTION: This general information is NOT a substitute for the advice of an attorney, accountant, and/or financial planner. Before you decide to pursue a reverse mortgage, you should carefully consider your individual
circumstances so you can make a wise decision about the most valuable asset you may own—your home. Factors to consider include whether the proposed
reverse mortgage is a recourse or nonrecourse loan, whether the loan would have a fixed or adjustable interest rate, and/or the current and projected market value of your home.
If you are thinking about selling a home with a reverse mortgage, or helping a family member understand what happens next, it is important to work with professionals who know how to guide the process clearly.
