In This Issue...

What is a Reverse Mortgage? by John C. Bennett, Attorney

What is a Reverse Mortgage?
by John C. Bennett, Attorney

Most people want to remain in their home as they get older. The slow-down in the economy and fixed retirement incomes can make this more difficult, or even impossible. One way to stay in the home and have more available cash is through a reverse mortgage. There is a lot of bad information out there. A reverse mortgage allows seniors to access the equity in their house without having to sell it. It can provide a monthly payment to borrowers and insure they have a place to live. Reverse mortgages are heavily regulated by FHA and are a great option for a lot of seniors. The negative stories in the news are usually about a senior who purchased an annuity or high-priced long-term care policy with the proceeds. Borrowers should never use funds from a reverse mortgage for these products. There is a lot to know about reverse mortgages, but here are just the basics.

To qualify for a reverse mortgage, a person simply has to be 62 years old or older and own their home. There are no credit score or income requirements to qualify. One big misconception is that the lender owns the house and can kick the borrower out after so many years. This is simply not true. With a reverse mortgage, the borrower signs a security deed, which is one of the same documents used in a regular mortgage. The terms are different, but the lender’s rights are the same. The borrower must be in default before the lender can foreclose. The default provisions are a little different in a reverse mortgage. In a regular mortgage, default usually means that the borrower has failed to make a payment. There are no payments to the lender in a reverse mortgage. The loan is in default and only comes due when the senior passes away, sells the house, fails to live in the house twelve consecutive months, abandons the house, lets the house fall into disrepair, or fails to pay taxes and insurance.

How much money is available to the senior depends on the appraised value of the house and the age of the borrower. The reverse mortgage allows the borrower to use only a portion of the equity in their home. The loan proceeds can be sent in a lump sum, monthly payments, available as a line of credit, or a combination of these options. The money is a loan, so it does not count as income for tax purposes. There is also a program where a person can purchase a house with a reverse mortgage, but this requires a substantial down payment.

The drawbacks to a reverse mortgage are that the closing costs are normally higher than a regular mortgage due to the required FHA mortgage insurance premium, and the loan balance grows as interest accrues. The loan balance can exceed the value of the house. On the other hand, there is absolutely no personal liability for the debt. Upon death, the lender may not recover any money from the estate or other assets of the borrower, even if the loan balance is more than the value of the house.

If the borrower passes away and there is equity left in the house, the heirs can sell the house, pay off the reverse mortgage, and keep whatever is left. Of course the heirs can pay off the reverse mortgage and keep the house. After weighing the costs and benefits of a reverse mortgage, a lot more people have used the program over the past couple of years. AARP and other websites have a lot of good information on reverse mortgages. Do your research prior to applying for a reverse mortgage and ask questions. The reverse mortgage is a wonderful option for many seniors looking to use the equity in their house without having to move or sell.

John C. Bennett, Attorney
Origin Title and Escrow, Inc