What Is A Reverse Mortgage & How Does It Work

What Is A Reverse Mortgage & How Does It Work

In my last blog, Reverse Mortgages for Beginners, I gave you a 30,000-foot view of the answers to some of the most common questions people just learning about reverse mortgages have.  

What I want to do over the next few weeks is to take a closer look at each individual question and answer from that blog.  This won’t be a microscopic view (I don’t want to put you to sleep), but a 100-foot view would be good.

This article will answer some additional questions, but it may raise others for you as you read.  If so, please stay tuned because I will answer them in future articles.  You can also contact me directly.  My information is at the bottom of the page.  In this article today, I am blending two questions together:  What is a reverse mortgage? And how does it work?

The name of the FHA insured reverse mortgage program is the Home Equity Conversion Mortgage (HECM).  There are other, non-FHA insured loans available, but to keep it simple, the HECM is the program that I will be focusing on in this article. 

What Is a Reverse Mortgage?

A reverse mortgage is a loan specifically designed for people aged 62 or older (55 or older for non-FHA insured loans), that allows homeowners to convert a portion of the value of their home into money they can spend without having to sell the home, give up title, or obligate themselves to a monthly mortgage payment.  

As long as the borrowers, or non-borrowing spouse, lives in the home as their primary residence, pays their property taxes and homeowners insurance, maintains the home and keeps their names on title to the home, the loan will not come due.  No mortgage payment is ever required as long as these conditions are met.

How Does a Reverse Mortgage Work?

A reverse mortgage is not free money. While it is great not having a mortgage payment, the borrowers must understand the cost.  All reverse mortgages are 100% negative amortization.  This means the loan balance increases instead of decreases like a normal “forward” mortgage.  Interest and mortgage insurance (all FHA loans have mortgage insurance), that are not being paid, are added to the loan balance monthly. 

When people understand this, they ask, “What happens if the loan balance exceeds the value of the home?”  Great question, I’m glad you asked.

This leads me to the topic of what happens at the end of the loan.  While this is technically another question, it fits under the category of how a reverse mortgage works. 

The loan is only due and payable when neither borrower (or the non-borrowing Spouse), lives in the home as their primary residence. At this point, the heirs have six (6) months to pay off the reverse mortgage with up to two (2) ninety (90) day extensions possible from HUD. 

The only requirement is that the loan be repaid in one payment. There is no requirement that the home must be sold, only that the loan is repaid. While this can happen through the sale of the home, it can also happen any number of other ways (such as with savings, insurance proceeds or refinancing the property). Whatever equity is still in the home will go to the heirs as long as they pay the amount owed on the reverse mortgage within the time frame that HUD allows.  

The Home Equity Conversion Mortgage is 100% “non-recourse”.  This means that as long as the borrowers are living in the home and keeping current with their property charges and maintaining the home, the loan can never be called due, even if more is owed on the loan balance than the home is worth. 

The heirs have options when they inherit a home with a reverse mortgage.  

I must give credit to my friend Dan Hultquist who wrote the book “Understanding Reverse” and updates it annually.  He has simplified the process down to two questions the heirs need to ask:

  1. Do you want to keep the home?
  2. Is there any equity left?
reverse mortgage options for heirs

If there is equity left in the home:

  1.  They can sell the home, payoff the reverse mortgage and keep the profit as their inheritance.
  2.  If they want to keep the home, they can simply refinance it with a new mortgage to payoff the existing reverse mortgage and keep the home.

If there is no equity left in the home:

  1. They can choose to just sign it over to the lender and walk away. In this case the lender will sell the home for whatever they can get for it and the mortgage insurance will cover the difference. Since the bank doesn’t lose any money, they will not come after the heirs or the estate for any additional money. 
  1. If the heirs want to keep the home, they have the option of paying the lender 95% of the current value of the home and they can keep the home in the family. For example, if the home is worth $200,000 at the time the last homeowner leaves, they heirs can keep it if they pay $190,000 no matter how much above the value the balance is. 

One last topic that I want to cover under this section is the way the borrower can elect to receive the HECM proceeds.  The options available come down to the interest rate chosen.  

If a fixed rate is chosen, the borrower can only receive the funds as a one-time lump sum.  However, there are FHA rules that limit the amount of money a borrower can receive during the first year of the loan.  The HECM reverse mortgage program restricts the amount of upfront funds the borrowers are allowed to draw out at closing to 60% of the available funds unless the money is being used to pay off an existing mortgage or lien on the home. In this case, the borrowers can draw enough to pay off the mortgage or lien, plus up to 10% of the available funds.  No line of credit or monthly payment is allowed with a fixed rate. Any remaining available funds will be forfeited.

However, the adjustable rate program allows for much more flexibility.  With this option, the homeowners have five options available

1. Line of Credit 

The available money is placed into a credit line that can be drawn on whenever the homeowners choose, up to the credit limit. Interest is only charged on the amount of money used. 

2. Lump Sum 

Just like the fixed rate, the borrower can take all the money that is available to them, (within the 60% cap limits, but any amount left over can be left in the line of credit and are available 12 months after the closing). 

3. Tenure Payment 

This is where all the money that is available is paid out in equal monthly payments for as long as either homeowner lives in the home. 

4. Term Payment 

All the money that is available to is paid out in equal monthly payments over a set period of months or years. At the end of this “term”, the payments will stop. However, the loan does not come due, and the borrowers can continue to live in the home. 

5. Combination of any of the above options 

The borrowers can take an immediate cash advance at the closing of any amount (up to the 60% limit), and either place the rest of the money in a line of credit, receive it as a monthly payment, or a combination of both.

There is a lot more that I could get into, but I wanted to offer just a taste of what the FHA insured Home Equity Conversion Mortgage offers and how it works.  I hope you found this article helpful, but please feel free to contact me with any questions.

Bruce Simmons

Bruce Simmons

I absolutely love what I do - working with senior homeowners to help them live a more comfortable, flexible and secure retirement. I have the absolute best customers in the world, and even though I worked in the forward mortgage business for a number of years, I could never go back to doing conventional loans. I'm a 100% reverse mortgage specialist.

5.0

I met Bruce from a referral who just love what he did for them on their Reverse Mortgage, So I contacted Bruce and told him my story and he came up with a great Reverse Mortgage for me and my needs and now I am living good and not worrying about Finances anymore. He had it done in a timely manner. If you are looking for the MAN to help you get the best Reverse Mortgage you need to call him and hope you let him help you.

Bruce is one of the most professional, knowledgeable and efficient experts I have worked ŵith ever in any field. He is fast to answer and always ready to help...and he's a great guy!

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!

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John Wickersham
John Wickersham

Just left us a 5 star review

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John Wickersham
December 22, 2022

I met Bruce from a referral who just love what he did for them on their Reverse Mortgage, So I contacted Bruce and told him my story and he came up with a great Reverse Mortgage for me and my needs and now I am living good and not worrying about Finances anymore. He had it done in a timely manner. If you are looking for the MAN to help you get the best Reverse Mortgage you need to call him and hope you let him help you.

google
Tim Mallory
November 11, 2022

Bruce is one of the most professional, knowledgeable and efficient experts I have worked ŵith ever in any field. He is fast to answer and always ready to help...and he's a great guy!

google
Kathleen Mitchell
September 18, 2022

I was hesitate about getting a reverse mortgage until Bruce Simons put my mind at rest. He is easy to work with, extremely knowledgeable and efficient. Things get done and he will make sure that you understand every part of the process. I interviewed several other people and he was hands down.....The only choice.

google
Mike Hoeffner
August 30, 2022

Doing a Reverse Mortgage is a major decision, when working with Bruce he came out personally to go over every thing in detail, there was no pressure to finalize the transaction, I had even put the loan on hold for awhile even though I had locked in my rate, I had called Bruce off and on for a few weeks to ask questions that I had concerns about and he was always available to talk to me. In the end it gave me time to feel comfortable about my decision to move forward with the Reverse. Bruce was very pleasant to work with and would certainly recommend Bruce if you are going to consider a Reverse Mortgage.

google
Jonathan Maiolatesi
August 22, 2022

Bruce Simmons at American Liberty is one of the best in the reverse mortgage industry. I have known and worked with him for years and he always does a great job. You are in good hands with Bruce and know that he will take good care of you or your loved ones every step of the way.

google
Ronda Giblin
August 20, 2022

Best thing I ever did! Bruce Simmons at American Liberty Mortgage is the best. He is always there to answer your questions, and can easily explain the whole idea of a Reverse Mortgage. He takes the time and goes through the entire process with you. It worked out so well for me. Thank You Bruce!

google
John Bell
August 20, 2022

We had researched Reverse Mortgages for 5 years and after hearing about Bruce Simmons and meeting with him, we finally decided to move forward with the Reverse Morgage. It has been over a year now and we are still very pleased with our decision. We think Bruce is very professional, knowledgeable and honest. Thank you, Bruce, for all your help.

google
Mary Bernard
August 19, 2022

I first met Bruce Simmons 2017. I found him on the internet. I was looking for someone local. I called him and explained I was only looking into doing a reverse mortgage, so I did not want him to think this was something I was ready to do. Bruce was friendly, very open about the basics of a reverse mortgage. Bruce came to my home and presented the figures and other details that he could offer. The first thing that impressed me was this was not a hard sell, more of a informational meeting. He was very open about all of the details, and answered my questions without hesitation. What really was evident was he was establishing a relationship with me, and I realized he knew I would not take the loan at that time. There was not enough equity in my home, and I would have to bring money to the table. Although I was not ready to do a loan, Bruce assured me he is always available for questions. Four years later, I finally did do a reverse mortgage, and I couldn't be happier with having done it. I have done away with a mortgage payment which allows me to fund my retirement account with that mortgage payment. We did some much needed landscaping with our cash out transaction, and will move on to improvements inside of the house. My reverse mortgage has a line of credit, and I feel sense security knowing it is there if I need it. Bruce explained that a reverse mortgage is not for everyone, but I feel certain that he paved the way for a strategy that worked for me. I will definitely do a refinance when the time is right. I will check in with Bruce to be sure what the benefits are when I do it again.

google
LESLIE HINES
August 19, 2022

I have worked with Bruce Simmons for 15 years. Bruce is one of the best in the industry. He is extremely knowledgeable, kinds and detailed in what he does. His clients love working with him and trust him to help them with their Reverse Mortgage loans. I would recommend Bruce to anyone I know that is thinking about or wanting to do a Reverse Mortgage. He will always take very good care of the customers and make sure their needs are met! Class act and one of the best in the industry by far!