I just received a great question from from one of our visitors…
Am I applying for both a loan, and a line of credit? Where does the possibility of any cash equity affect me?
What I had been told was: This is to be a simple transferral of my home to the company, with no further mortgage payments from me for the rest of my life. Upon my passing, you assume full ownership of the property. Am I too simple and naive in my understanding and explanation?
I remain interested and confused.
Well, where do I begin? I can only assume that the transaction to which you are referring is the HUD Home Equity Conversion Mortgage (HECM or “Heck-um”), reverse mortgage. If this is the type of financing you have started or are considering, then it is NOT transference from you to the lender and it absolutely is a loan.
There are a number of different ways you can choose to receive the money on the adjustable rate programs and you can also opt for a fixed rate, but under the fixed rate programs, you would have to take all available funds at one time at the initial draw.
The loan does accrue interest on the unpaid balance, and the loan operates in the reverse of a standard or forward loan in that your balance grows over time (whether you are taking money out over time and accruing interest on the balance or take a lump sum draw and accrue interest on that) instead of you having to make monthly payments and your balance going down as is the case with a standard, forward mortgage.
A standard or forward mortgage is a falling debt, rising equity loan due to the fact that the amount you own goes down and your equity goes up with your monthly payments. A reverse mortgage is a rising debt, falling equity loan due to the fact that you are taking money out of your home and since you make no payments, the balance goes up and your equity goes down.
But as with either loan, you always own the home and any equity in the property belongs to you or your heirs. The reverse mortgage loan allows you to live in the home for the rest of your life without having to make any monthly payments, but, like any loan, you are still responsible for your taxes, insurance and maintenance on the property.
The feature that protects borrowers is that this loan is a “non-recourse” loan. In other words, if the value of the property 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 value of the property and review the amount owed on the reverse mortgage. If there is still equity in the property, they notify the lender what their plans are for paying the loan off (refinance the loan or sale of the property) and the lender 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 simply choose to Deed the property back to the lender as the heirs are not required to do anything and as stated previously, the lender has no other recourse for the repayment of the loan. 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 lender 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 lender in the case of no remaining equity.
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