LEGAL EASE
by Shane Givens and Summer McWhorter

July 25, 2013

What is a reverse mortgage?


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I had someone call the office last week and ask that I explain reverse mortgages. Here goes. A reverse mortgage is a type of loan which enables a homeowner to access a portion of the home's equity through monthly payments from the lender. To explain, as we all know too well, in a “regular” mortgage the homeowner makes monthly payments to the lender. After each payment, the loan balance decreases by the amount of the principal paid to the loan. When the mortgage has been paid in full, the property is released from the mortgage. In a reverse mortgage, however, the lender makes monthly payments to the homeowner.

Every time the lender makes a payment to the homeowner, the equity in the home decreases. So, a reverse mortgage is really like having a home equity loan on your home and getting monthly installments on that line of credit. Unlike most mortgages, however, when the homeowner dies, the lender usually gains possession of the home.

Reverse mortgages are designed for older homeowners who want to liquidate the value in their homes because they need money for living expenses or special needs. To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years old and must occupy the property as their principal residence. In addition, any existing “regular” mortgage on the property must be low enough that it will be paid off with the reverse mortgage proceeds. There are no minimum income or credit requirements because no payments are required on the mortgage. The proceeds from the loan may be used at the discretion of the borrower and are not subject to income tax payments. While credit is not part of the qualification process a current or pending bankruptcy will require court approval prior to closing.

Although interest rates are usually lower on a reverse mortgage, the cost of obtaining a reverse mortgage is usually greater than the costs of a conventional mortgage. Homeowners can expect higher origination fees and will usually be required to purchase mortgage insurance, as well as pay a yearly mortgage insurance premium equal to 1.25 percent of the mortgage balance. In addition, there are costs during the life of the reverse mortgage. A monthly service charge (typically between $25 and $35) is added to the balance of the loan. However, in most cases the costs of a reverse mortgage can be financed with the proceeds of the loan.

The loan comes due when the borrower dies, sells the house, fails to keep the taxes or insurance current, or moves out of the house for more than 12 consecutive months. Once the mortgage comes due, the borrower or heirs of the estate have an option to refinance the home and keep it, sell the home and cash out any remaining equity, or turn the home over to the lender. Once a reverse mortgage is called due and payable, the borrower (or their heirs) can possibly be granted time extensions by the lender to give them up to one year to make this decision. If the property is turned over to the lender, the borrower or the heirs have no more claim to the property, nor do they have any equity in the property.

This column is intended for general information purposes only. The answers to most legal problems rely on specific facts of a particular situation; therefore, it is very important to see a lawyer when these situations arise. Please e-mail questions for future columns to givenslaw@tds.net.