Payment and Repayment of Reverse Mortgages
Reverse mortgages are an attractive option for senior citizens ages 62 and older who want the benefits of liquidity but have a large amount of their financial assets tied up in their home. Reverse equity mortgages are a special type of loan used to “unlock” the equity in older homeowners’ homes, allowing seniors to cash in on the equity without selling the home or transferring the title. When considering whether to apply for this special type of loan, one must note that a reverse mortgage, while a somewhat unique financial product, is still a mortgage that has a lender, borrower, and repayment terms.
Reverse equity mortgages got their name because the cash flow is reversed. In a traditional mortgage, the homeowner makes monthly payments to the lender and the equity in the property increases as the mortgage balance decreases. At the end of the loan term, the loan is paid in full and the lender removes the lien from the property.
In a reverse mortgage, on the other hand, the homeowner does not make any payments on the loan. Once the reverse mortgage loan has been approved, the funds are disbursed to the borrower according to the payment options they’ve selected (in a lump sum, as monthly payments, or through a line of credit) and a new lien is placed against the property. Generally, the balance of the loan—that is, the amount that will have to be paid back later—grows over time. All interest and fees accrued on the loan are added to the outstanding debt on the property, which can never exceed the value of the home.
Loan payments on a reverse home mortgage are deferred as long as the property is the borrower’s primary residence. This means that the borrower has no obligation to repay the loan until he or she dies, the home is sold, or the owner otherwise vacates the property for 12 consecutive months (for example, to move into an assisted-living facility). Once the property has been permanently vacated by the borrower, the deferment period ends and the loan repayment begins.
The reverse mortgage is ultimately repaid using the proceeds from the sale of the house. The heirs or estate-holders who now own the property—since lenders never actually take “ownership” of the property—are now responsible for repaying the balance of the loan. These heirs have several options: they can pay back the loan using private funds, refinance the mortgage, or sell the home to pay off the debt. If the heirs sell the home and make a profit on the sale, they are able to keep this profit.
The amount of the loan cannot exceed the home’s sale price; if the proceeds from the sale of the property are not enough to repay the loan, the lender covers the difference. Once the loan is repaid, the terms of the reverse home mortgage are over.