Reverse Mortgage Facts

Reverse Mortgage Facts

So what are the reverse mortgage facts?

In a nutshell, a reverse mortgage is an FHA insured loan that is specifically designed for homeowners, age 62 and above, that allows you to convert a portion of the value of your home into tax-free money*, without ever having to sell your home, give up title or obligate yourself to a monthly mortgage payment.

“OK, that’s what a reverse mortgage is,” you say, “but how does it actually work? How is it that someone can actually get a loan that they never have to pay back?”

Great question. I’m so glad you asked!;-)

What is a Reverse Mortgage?

The Facts

As I said above, with a reverse mortgage, you never “obligate yourself to a monthly payment”.

Please do not misunderstand me here – A reverse mortgage is not free money. You are still charged interest, it’s just that you are not actually paying it out of your pocket. As long as you, or anyone else who is signed on the reverse mortgage loan, are

  • Living in the home as your primary residence,
  • Paying the property taxes and homeowner’s insurance,
  • Maintaining the property, you will never, ever have to have to repay the loan or be forced to move. The reverse mortgage loan only becomes due and payable when the last person who is signed on the loan can no longer live in the home, or when the youngest borrower turns 150 years old.

In fact, there is a form that you sign at the closing called a “Limited Liability Notice” that states:

Your liability under the Plan is limited to the net sale proceeds from the sale of the property. You will have no personal liability for the payment of the note. No deficiency judgment may be taken against you or the estate.”

That should explain clearly enough for you that you’re never held responsible to repay the loan. “But”, you ask, “what happens to the interest you’re being charged?”
Another great question! 😉

That interest does in fact have to be repaid at some point. What happens is that you are charged interest for as long as you keep the loan.
But instead of having to pay it every month like a regular mortgage, the interest is added to the loan balance. So your loan balance on the reverse mortgage loan gets larger instead of smaller. This is why we typically only loan between 40% – 60% of the value of the home.

So the longer you keep the reverse mortgage, the larger the balance gets. Depending upon how quickly your home appreciates, your loan balance could very possibly eclipse the value of the home. But that’s OK!

“So what happens if the balance does get larger than the value of my home?”, you ask. YOU WIN! (Boy, you do have a lot of questions, -of course they are all good ones- but you should check out my FAQ page for answers to the most common “What is a reverse mortgage?” type of questions).

Actually, all FHA reverse mortgages have something called “mortgage insurance” on them. This is not insurance against fire or if you die. It’s actually to protect the lender in the case that your loan balance does grow larger than the value of your home.

As long as you or your spouse (or whomever is on the loan with you) is living in the home and paying the property taxes, homeowner’s insurance and maintaining the home, which I’m sure you do anyway, it really makes no difference at all how much is owed on the reverse mortgage. You could owe $100,000 more than the home is worth, but the lender can never kick you out because this is a 100% non-recourse loan.

That’s what the mortgage insurance is for. It pays the difference to the lender once the last borrower permanently leaves the home. So since the lender is getting their money from the mortgage insurance, they can never come after you, your heirs or the estate for any deficiency.

More Details

I know that this page is getting quite lengthy, but I feel that I have to explain two more brief topics that I have never seen on any other reverse mortgage web-site.

Sometimes my wife reminds me that this is a very dry (i.e. boring) subject for a web-site, and I am probably going into too much detail, and worse, possibly confusing you, so feel free to quit any time and just pick up the phone to call and talk to me.  My direct line is (303) 467-7821 and my toll free number 9which also rings directly to me) is 877-467-7801.

Topic One

Compounding Interest – This is a great thing for savings accounts and investments, but it can actually work against you when you borrow money. What this means is that you are charged interest on the interest that you have already been charged. With reverse mortgages, you are only charged interest on the money that you actually use, but the next month, you are charged interest on the new balance, which includes the interest that you were charged the month before.
I think an example is in order:

So let’s say that you take out a reverse mortgage loan that has an initial balance of $100,000. Let’s also say the interest rate is 5.06%. The amount of interest that you would be charged in the first month is $466.67. This amount is added to the original loan balance to bring your new balance up to $100,466.67. This new amount is what you’re charged interest the following month. So in the second month of the loan, your interest charge would be $468.84, (notice it is slightly higher). This amount is added to the balance of $100,466.67 to bring your balance up to $100,935.51.

Even though the interest rate in the above example is fixed, the actual amount of money you are charged each month increases because you are being charged interest on top of interest.

Please understand that I am not telling you this to try to talk you out of getting a reverse mortgage. My goal is simply to make sure that you are making an informed decision.

I would much rather you learn this now, before you get a reverse mortgage, than after it’s too late. I am very proud of the fact that I have never had a customer (or an heir for that matter), come back to me after they closed the loan and tell me that they regretted their decision, and I’ve closed over 650 reverse mortgage loans since 2003.

I think the reason is that they knew everything they needed before hand to make an educated, informed decision. That is what I want for you.

Topic Two

Two Notes and Two Deeds of Trust – I really do wish that the reverse mortgage counselors would get on board with explaining to the people they counsel that there are actually two notes and two deeds of trusts on reverse mortgage loans. This can be very confusing for people and cause them to take a step back, wondering if they are being ripped off.

Here’s how it works: Every FHA reverse mortgage loan closed in the United States with an adjustable rate has two notes and two deeds of trust.

A note is something that you sign at the closing that says that you intend to pay the loan back at some point in the future, when you no longer occupy the home as your primary residence. Remember, only the amount up to the value of the home needs to be repaid.

On a normal (forward) loan, the note says that you will repay the mortgage company a certain amount of money each and every month at a certain interest rate until the loan is paid in full.

On a reverse mortgage note, there is no repayment schedule, but it still says that the mortgage company will be paid back at some point in the future and it states the interest rate as well. But there is also a second note that says that the “The Secretary of Housing and Urban Development” will be paid back at some point in the future. Everything else on the note is exactly the same.

A deed of trust is what gets recorded at the county that proves that there is a lien against the property. In some states they use mortgages, but in Colorado we use deeds of trust. Each is a little different, but they serve the same function so a lot of people use the terms interchangeably.

The deed of trust says essentially the same stuff that the note does but has a lot more details that explain the rights of the homeowner and the rights of the lender. Just like the reverse mortgage notes, there are two deeds of trust – one for the lender and the other for the Secretary of Housing and Urban Development.

Let me be perfectly clear here – there is only one loan on the home. Once that one loan is paid off, both liens get released. Now I don’t know why HUD requires their own lien on the home with reverse mortgages, (they didn’t consult me when they made the decision in 1988), but here is my best, slightly educated guess:

I think that HUD looks at reverse mortgages as a liability to the lender. On a normal loan, the borrower is obligated to pay the lender, so the loan is an asset to the lender and a liability to the borrower. With a reverse mortgage, a lot of the time, the bank is the one obligated to pay the borrower – so the roles are switched.

Since FHA, which is a division of HUD, is guaranteeing to the borrower that the money will be available, they look at this loan as a liability to the lender and they want their own lien on the property securing the loan.

That’s my story and I’m sticking to it…until proven wrong.

Lastly, both the notes and deeds of trust have a loan amount on them. If you are not prepared for it, the amount that you see will freak you out and send you screaming into the night. Well, maybe not that bad, but it will be a shock.

The loan amount on these two documents is equal to one and a half times the value of your home (up to the maximum FHA lending limit of $679,650). So if you have a $300,000 home, the amount that you see on the note and deed will be $450,000.

As I mentioned above, the amount that you can receive from a reverse mortgage is typically 40% – 60% of the value of the home. So if you qualify to receive 60% of the value of your $300,000 home, that means that you are only getting $180,000, but the note and deed say you owe $450,000! What’s up with that!?

Here’s the scoop – You might keep this loan for 20 years or you might get hit by a bus the next day, but let’s hope not. The lender doesn’t know how long you might keep the reverse mortgage.
Since this is a negative amortization loan, (the balance gets bigger over time), the lender doesn’t know how much might eventually be owed, but they have to put a number on the form, so they decided to use the formula of V x 150% = amount of loan.

But the amount that needs to be repaid is only the amount owed, if that makes sense.  If you take out a $200,000 “forward” mortgage and pay on it for the next 20 years you might only owe $60,000, but if you were to look up the deed recorded in public records, the deed would still say $200,000. How can that be when you only owe $60,000? The deed was recorded when you actually did owe $200,000, however the lender can only collect on the amount that is actually owed.

The same is true with the reverse mortgage. Even though the deed says one possible figure at some unknown time in the future, you only owe what the actual balance is at the time that you no longer live in the home.

Whew! Hopefully that didn’t make your head explode.

But if you still need more information, check out my reverse mortgage blog to stay up to date on the continual changes in the reverse mortgage industry that might affect whether or not you choose to get a reverse mortgage.

You can receive the monthly newsletters by standard postal delivery or as an e-mail.

As always, please feel free to contact me directly with any questions.

Reverse Mortgage Guide

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Tim Mallory
Tim Mallory

Just left us a 5 star review

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!

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.

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.

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.

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!

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.

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.

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!