With a reverse mortgage, am I applying for both a loan and a line of credit?  Where does the possibility of any cash equity affect me? I had been told this would be a simple transfer of my home to the company, with no further mortgage payments from me for the rest of my life.  Upon my passing, the bank will own my home.  Am I too simple and naive in my understanding and explanation? I remain interested and confused. –Don C.

Reverse mortgages are nothing but a loan against your home

Great question!  Reverse mortgages, such as the HUD Home Equity Conversion Mortgage (HECM), are a unique financial tool allowing homeowners to access home equity. Contrary to some misconceptions, the bank does not take ownership of your home.

Here’s how it works: Interest accrues on the unpaid balance of the loan.  The dynamics of a reverse mortgage are different from a traditional mortgage.  With a standard mortgage, you make monthly payments, gradually reducing your debt and increasing your equity.  In contrast, a reverse mortgage has a growing balance over time, either through periodic withdrawals or a lump sum draw, both accruing interest.

This is why it’s termed “reverse” – instead of paying down the debt, you’re essentially borrowing more over time, leading to increased debt and decreased equity.

However, an important aspect to note is that the ownership of the home always remains with you.  Any equity that exists in the property is yours or your heirs’.  The reverse mortgage enables you to live in your home for the rest of your life without the burden of monthly payments, although you remain responsible for property taxes, insurance, and maintenance.

A reverse mortgage can be a strategic way to manage your assets in retirement, but it’s important to understand this loan’s rising debt and falling equity nature.

Reverse mortgages have non-recourse protections 

The feature that protects borrowers is that this loan is a “non-recourse” loan.  In other words, if the property’s value is not adequate to repay the entire loan when you pass, your heirs can never be made to pay any additional money.

The only thing the lender or HUD can use to pay the loan back is the sale of the property, and therefore, they can never attach any of your other assets or ask your heirs to repay any shortfall.

However, if the property is worth more than the loan balance, your heirs can keep the home and pay off the loan balance, or they can sell the home and pay off the loan balance and keep the excess equity.  The bank does not automatically get the house.

When you pass, your heirs have a right to determine the property’s value and review the amount owed on the reverse mortgage.

The remaining equity belongs to you, NOT the bank.  

If there is still equity in the property, they notify the bank of their plans for paying the loan off (refinance the loan or sale of the property), and the bank will work with them to accomplish this goal.

If, however, they look at the balance and property values have gone down and there is no equity, heirs can choose to Deed the property back to the bank as the heirs are not required to do anything.  As stated previously, the bank has no other recourse for the loan repayment.

If you have no heirs, just like with any other loan, the bank would have to foreclose on the existing security documents, and then they would sell the home to repay the obligation.  But under all these options, the bank can never “just assume” ownership without legal due process of law.

Please make no mistake about it: a reverse mortgage is a loan.  However, it is a loan with safeguards built in to protect your heirs later after you pass while giving them the option of deciding whether or not it makes sense for them to keep the property, sell it themselves, and keep any equity left in the home, or give it back to the loan servicer in the case of no remaining equity.

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ARLO recommends these helpful resources: 

• HUD.GOV