Does the bank own my home? Understanding Reverse Mortgages
When exploring reverse mortgages there are so many questions one may ask themselves.
Am I applying for both a loan and a line of credit? Where does the possibility of any cash equity affect me?
I had always been told that a reverse mortgage would be a simple transferral of my home to the company, with no further mortgage payments from me for the rest of my life. Eventually, upon my passing, the bank will own my home.
While this sounds easy and straightforward, a naive understanding is what can get you in trouble. Let’s dive in a little further.
Reverse Mortgages Explained
A reverse mortgage can also be referred to as the HUD Home Equity Conversion Mortgage (HECM or "Heck-um"). It is important to remember that a reverse mortgage is absolutely a loan.
There are a number of different ways you can choose to receive the money on the adjustable rate programs. You can also opt for a fixed rate, but under the fixed rate programs, you have to take all available funds at one time at the initial draw of the loan.
NOTHING BUT A LOAN AGAINST YOUR HOME
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 since the amount you own goes down and your equity goes up with your monthly payments.
Verify my mortgage eligibility (Dec 26th, 2024)
A reverse mortgage is a rising debt, falling equity loan since 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.
Verify my mortgage eligibility (Dec 26th, 2024)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.
NON-RECOURSE PROTECTIONS
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.
Verify my mortgage eligibility (Dec 26th, 2024)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.
Verify my mortgage eligibility (Dec 26th, 2024)
REMAINING EQUITY BELONGS TO YOU, NOT THE BANK.
If there is still equity in the property, they notify the bank what their plans are for paying the loan off (refinance the loan or sale of the property) and the bank will work with them to accomplish this goal.
However, if 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 bank as the heirs are not required to do anything and as stated previously, the bank has no other recourse for the repayment of the loan.
Verify my mortgage eligibility (Dec 26th, 2024)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.