The Reverse Mortgage loan is probably the most misunderstood product in the mortgage industry. Simply put, a Reverse mortgage allows homeowners who are at least 62 years old to access a portion of the equity in their home without having a monthly mortgage payment as long as they remain in their home. Introduced in the 1980’s as the Home Equity Conversion Mortgage (also referred to as a HECM), this loan is still widely referred to as a “Reverse” mortgage.
Once thought of as a means of last resort, the HECM loan is now widely used as a retirement planning tool as more financial planners and estate planning attorneys have learned about the unique features the HECM offers. To ensure safety of the borrowers, the loans are overseen by The Department of Housing and Urban Development (HUD) and insured through the Federal Housing Administration (FHA).
Since reverse mortgages are “non-recourse” loans, a homeowner can never owe more than the value of their home, regardless of the balance of the loan or the value of their home. Unlike a traditional “forward mortgage”, a reverse mortgage has no required monthly payment – rather there’s a monthly accrual for mortgage interest that’s added to the loan balance every month. Reverse mortgages are referred to as “negatively amortized” loans since the mortgage balance increases over the life of the loan. The reverse mortgage remains open as long as the homeowners maintain the property as their primary residence. When the homeowners move out of their home, the reverse mortgage balance must be paid. In most cases homeowners sell the home to pay off the mortgage balance, but selling the home is not required – if the homeowner or heirs wish to keep the home, they can use other assets to pay off the reverse mortgage balance.
In terms of how funds can be accessed with the reverse mortgage, a homeowner has several options – they can: 1) receive cash at closing (subject to limitations in the first year); 2) receive a monthly payment for as long as they remain in the home; and/or 3) establish a credit line that can be used in the future if and when funds are needed. Proceeds from a reverse mortgage are considered a return of equity so the funds are not taxable and homeowners are free to use their proceeds without any restriction.
One of the biggest misconceptions that exists about reverse mortgages is that the bank owns the home; this is 100% incorrect, as title to the home always remains in the homeowner’s name. Another misunderstanding is that if there is any equity left at the time the home is sold, the bank keeps the equity – also incorrect. If there’s equity remaining at the time the mortgage is paid off, the equity is retained by the homeowners or their heirs.
While the reverse mortgage can be a perfect solution for many people, it certainly is not right for everyone. The reverse mortgage product is ideally suited for homeowners that wish to stay in their home for a long time. For those who do have a long time horizon, a reverse mortgage can be the ideal tool to help make their retirement more comfortable.
JD Dinnocenzo (NMLS#118902) is a Certified Mortgage Planner, Certified Senior Advisor, H.E.C.M. (Reverse Mortgage) Specialist and M.B.A. Dinnocenzo has been in the mortgage industry for 20+ years and holds licenses in Florida, New York, New Jersey, Connecticut and Pennsylvania. JD can be reached on his cell phone at 901.553.6957.