Understanding Reverse Mortgages

A Reverse Mortgage is a tax-exempt, non-recourse, loan for senior homeowners age 62 and older that allows them to convert home equity into cash. The loan never requires payments or any repayment until the homeowner permanently moves out, sells the house or dies. The borrower never owes more than the value of the home, regardless of what the loan balance is at repayment.

The amount of loan proceeds available to the senior depends upon a variety of factors including the appraised value of the home, the age, the cost of the loan and regional or overall program limits set by the Federal Housing Administration or loan investors. Generally, the lower the age of the borrower (and therefore the longer the borrower’s life expectancy), the smaller the loan amount for which the senior may qualify. The higher the home value, the higher the loan amount for which they may qualify. Finally, higher interest rates and the costs and fees associated with the origination of loan limit the total loan amount available to the borrower.

Payment Options

The payment options available are dependent on the program and sometimes restricted by the state. However, most loan proceeds available to the borrower come in the form of a lump sum, a lifetime tenancy monthly payment, monthly for a limited term, a line of credit or some combination of each.

How Repayment Works

Over time, the loan balance of a Reverse Mortgage will rise. It grows because the borrower may continue to receive loan advances and is being charged interest on the outstanding loan balance while no repayment is being made until a future time. No repayment is required under a Reverse Mortgage as long as the borrower lives in the home as the principal residence. When the last surviving borrower dies, sells the home or permanently move away, the full loan balance becomes due and payable.

Even when due, there is a limit on the amount of the borrower’s repayment obligation, known as the “non-recourse” limit. Quite simply, a “non-recourse” limit means that the total amount owed by the borrower can never exceed the value of the home (after deducting the costs of sale) at the time the loan becomes due and payable.

For more information on reverse mortgages, please visit the Federal Trade Commission’s website at www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm.