Your user-friendly guide to Reverse Mortgages!
A Reverse Mortgage is exactly what it sounds like… a mortgage going backwards! Think of a mortgage (any mortgage) as a balloon, with the initial loan balance being the air inside the balloon.
With a traditional mortgage, every time you make a payment, a little air is let out of the balloon and the mortgage balance goes down. By the time you make your last payment, there is no more air left in the balloon, and your mortgage is paid off.
A reverse mortgage is just the opposite. You start out with the same air as the traditional mortgage (equal to the beginning loan balance). However, instead of making a mortgage payment each month and letting air out of the balloon… you now skip the monthly payment! Each time a payment is skipped – air is added to the balloon. As you continue to skip payments, the balloon (and mortgage balance) continues to grow in size.
The mortgage balance will continue to grow indefinitely until something known as a maturity event takes place. The maturity event will signify the end of the reverse mortgage, and will occur when one of the following events happens:
- The last borrower residing in the home passes away.
- The property is sold.
- The homeowner fails to pay property taxes, hazard insurance, or the property falls into disrepair due to a lack of maintenance.
- The borrower moves to another residence, or leaves the home for a period of 12 consecutive months.
So, what happens after a maturity event? As you might guess, the loan must be repaid. In most cases, your home will be sold to raise the money needed to retire the loan. Assuming typical home value appreciation and an average life expectancy, your home will likely be sold for more than is owed on the reverse mortgage. Any sales proceeds in excess of the mortgage payoff amount and sales expenses are retained by your estate for distribution to your heirs or other named beneficiaries.
But what happens if the loan balance grows to a bigger amount than the house could actually be sold for? Not a problem! If the final proceeds from your home sale (after real estate commissions and closing costs) turn out to be LESS than the actual loan balance due – that is okay. The lender will accept your net sales price as full settlement. Don’t worry about the lender getting shorted here. Reverse mortgages are FHA insured, and the government will make up any shortfall to the lender!
Neither your heirs, nor your estate will ever have any additional liability if the mortgage payoff amount is greater than the net sales price! This limited liability for repayment of the loan is known as No Recourse. It simply means that the lender must accept the house’s net sales proceeds as payment in full, and cannot seek additional reimbursement from any other assets your estate may own.
For more easy-to-understand explanations about reverse mortgages, visit our website at www.62andUP.com. Scott and Shelley Weier are reverse mortgage specialists with over 55 years of combined real estate lending experience in the greater San Diego area. Contact us directly with your questions at (760) 814-1882.