Dollars and Sense: Reverse Mortgages: Part One

The Paseo Financial Group

The reverse mortgage of HECM loan products can be a challenge to explain or understand, even for people who have plenty of financial experience. Over the course of five articles, we hope to put things in simpler terms.

The reverse mortgage is a home equity loan that’s designed to help seniors tap into the equity in their homes. This loan is only available to homeowners who are 62 or older and have built up substantial home equity.

The other unique features of a reverse mortgage are best explained by a comparison to traditional forward mortgages. In a forward mortgage, the borrower makes monthly payments to the lender, gradually reducing the loan balance and building equity. With a reverse mortgage, the borrower receives payments from the lender and does not need to make payments back to the lender as long as he or she lives in the home and continues to fulfill basic responsibilities, such as payment of taxes and insurance. The loan balance grows over time as the borrower receives payments and interest accrues on the loan. Essentially, the mortgage works in the reverse direction of a forward mortgage, which is where the term “reverse” comes from.

All loans must eventually be repaid and this one is no different. The loan is due once the borrower sells the home or passes away. Of course, the borrower may also choose to pay off the loan at any time. In most instances, a reverse mortgage is paid off when the mortgaged home is sold. It is important to note that reverse mortgages are designed so that the amount owed cannot exceed the value of the home. If, for example, a reverse mortgage balance is $150,000 and the house is sold for $125,000, the borrower does not owe the difference. If the house can be sold for more than the value of the reverse mortgage, that equity belongs to the borrower or the borrower’s estate.

The HECM is a program of the Federal Housing Administration (FHA) and these loans are guaranteed by the federal government. This guarantees that the homeowner will receive all the payments that they are entitled to as a result of the reverse mortgage. This removes the risk of the lender going bankrupt or simply refusing to make good on its obligations. Second, the FHA protects the borrower and their estate from ever owing more on the loan than the home is worth. In circumstances where the debt outstanding on the reverse mortgage exceeds the value of the home, the FHA covers the difference.

Melanie Sedam is a HUD certified HECM mortgage originator and owns ReverseMortgage62AZ.com, specializing in mortgage financing in the 55+ communities of Arizona. She can be reached at 520-829-5219 or Melanie@ReverseMortgage62AZ.com. There is also a 35-minute PowerPoint presentation on her website that goes in the financial details/numbers of a reverse mortgage loan.