Reverse Mortgages Explained
Reverse mortgages explained: Learn about reverse mortgage loans and how they work, who is eligible, and the benefits of this financial tool.
This financial tool allows homeowners 55-years or older to access the equity in their home. Homeowners can borrow against their home value and receive funds as a lump sum, fixed monthly payment, or line-of-credit. Unlike a traditional mortgage, a reverse mortgage doesn’t require the homeowner to make any loan payments until the loan is paid off. In other words, the interest expense is added to the loan and paid when the home is either sold, refinanced or simply paid off.
The Federal Government designed the Home Equity Conversion Mortgage (HECM) to provide financial aid for senior homeowners. It gives access to some of the equity in the home so the owner can enjoy the freedom and comfort of the home for the rest of their lives.
You will never owe more than what your house is worth. Suppose through extreme market conditions the loan balance exceeds the value of the home. In that case, FHA reimburses the lender for the difference of the market value and the amount owed. Therefore, leaving no possible debt to heirs.
Common Misconceptions of a Reverse
There are numerous misconceptions about reverse mortgages, largely because this loan has evolved and improved drastically over the last 40 years. Generally, a reverse mortgage loan functions very similar to other residential mortgages. The key difference is the interest payment accrues.
Below is a summary of these misconceptions, specifically the Home Equity Conversion Mortgage (HECM).
1 Plau, Wade, 2018. “Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement (The Retirement Researcher’s Guide Series) (Vol. 1)” Retirement Researcher Media. 2nd Edition. Pgs 96-99
Infographic Explainer of a Reverse Mortgage Equity over 5, 10, 15 and 20 years
- With a reverse mortgage, the loan balance will continue to grow each year; however, so may the equity balance. The following example demonstrates that your equity may increase yearly, event with a reverse mortgage. Assuming inflation of 5% (the 10-year historical avg. is 14.6%) and a market interest rate of 5.81% + 0.5% (mortgage insurance) = 6.31% the equity balance continues to grow each year.
- In year one the equity balance is $350,000. In year five the equity balance is $422,210. Finally, in year 20 the equity balance is $704,635. Even with the interest expense accruing, the equity in the home continues to increase every year!
