In a nutshell: how a reverse mortgage works

Laurie MacNaughton © 2018

Reverse mortgages…you’ve seen the ads a hundred times. But odds are you have a lot of questions.

In a nutshell, here’s the scoop

The first thing to know is a reverse mortgage is an FHA-insured home loan. I always start with this point simply because there can be confusion about the fact this is a home loan, in many ways not unlike any other loan we’ve all grown up with.

Here’s where the difference comes in: a reverse mortgage loan is repaid when the last person on title permanently leaves the home. In fact, the very name itself comes from the fact the loan is repaid in reverse on the back-end, rather than being repaid monthly.

The second thing to know is there are two kinds of reverse mortgages, namely a refinance reverse mortgage and a purchase reverse mortgage.

Reverse Mortgage Refinance

The best-known “flavor” of reverse mortgage is the Home Equity Line of Credit. It only differs from a traditional line of credit in that a reverse mortgage line of credit is not repaid until the last person on title permanently leaves the home. In other words, homeowners can borrow some of their home equity without picking up a monthly mortgage payment.

Reverse mortgage proceeds can be used for any purpose. Common uses include:

• Financial safety-net in retirement
• Healthcare
• Home repairs or improvements
• Paying off debt

Reverse for Purchase

This is an seniors’-only purchase loan, and it was designed as a way for homebuyers to purchase a retirement home without adding a monthly mortgage payment to their retirement budget.

Homebuyers provide a down payment (typically about 50% of the purchase price), and the loan amount covers the other 50%. There’s never a monthly mortgage payment due.

Buying a home with a Reverse for Purchase loan is an ideal way for homebuyers to double their purchasing power, and it is notably easier to qualify for this FHA-insured loan than it is to qualify for most other home loans.

Homeowner Responsibilities

With either type of reverse mortgage, because they still own the home homeowners remain responsible for:

• Property taxes (unless property tax exempt)
• Homeowners insurance
• Homeowners association dues (if applicable)
• Condo Dues (if applicable)

To explore how an FHA-insured reverse mortgage might help you or your client with retirement plans, give me a call. I always love hearing from you.