How does a reverse mortgage work?

I heard when you die, the bank keeps your house and then you can't leave it to your family.

7 Answers

  • MRA
    Lv 4
    9 years ago
    Favorite Answer

    A reverse mortgage is a loan like any other standard loan. The bank places a lien on the property in exchange for advancing you money from the equity you have in your home, and when it becomes due, it must be paid off. A reverse mortgage can be paid off any time without a prepayment penalty. You still own the home and are responsible for insurance and property taxes. When you die, your estate / heirs will inherit the home; the bank does not keep the house. But any liens on the property, and this also includes unpaid property taxes, mechanics liens, federal/state/county liens, lines of credit, 2nd mortgages, etc., must be paid off first before the heirs can take it over. This applies to any mortgage on the property, even if it is not a reverse.

    A problem arises when the loan is greater than the value of the home and there is nothing left to inherit. In this case, the heirs may just want to walk away and sign over to the bank a Deed in Lieu of Foreclosure, and let the bank deal with selling the home. Again, this would apply to any loan on the home if the home is upside down. But the bank doesn't automatically take over or own it when you die.

    The good news with a reverse is that unlike regular loans, the loan is not due immediately and you have at least 6 months to either refinance or sell. If you are working with the bank and make a good faith effort, you may be able to get two 3-month extensions for a total of one year. You don't get that with a regular loan.

    Some heirs don't like any loans on the family home because it means they inherit less. I guess if they had the funds to help their relatives in the first place so that the senior didn't need to do a loan, then that would be the perfect scenario. But most children do not have the funds to take care of both their own families and their parents; and most seniors typically only have the home as their only available asset; and if they need funds to survive or in order to live a good quality of life, they have a right to spend their money (home equity) in any way they see fit and no adult "child" is entitled to an inheritance.

    The reason why reverse mortgages are frowned upon by some is because in order for the senior not to have to make monthly mortgage payments like you have to do with a regular loan, each month that they do not make the payment, the loan balance increases - and therefore the remaining equity decreases over time; And this means, of course, less inheritance. But if a senior had the income to make monthly mortgage payments to begin with, they probably would not need a loan as they would have the cash already in hand. If they didn't have the cash to manage their monthly budget or pay for major expenses (medical, home improvements, etc.), doing a regular loan requiring monthly payments would be like borrowing from Peter to pay Paul, as the loan would be used to pay itself. Once the money runs out and they can't make that monthly payment, the bank would foreclose on them. With a reverse, since no monthly mortgage payments are required, the bank cannot foreclose on them for not making monthly payments.

    Also, because no mortgage payments are required, what makes a reverse mortgage particularly appropriate for seniors is that they do not have to qualify in terms of income or credit history, since most seniors are on a fixed income and likely not to qualify for a regular loan.

    Source(s): I specialize in reverse mortgages (CA)
  • MadMan
    Lv 7
    9 years ago

    Partly correct. You have a fully paid off house but need cash. You get cash, either as an amount per month or a lump sum and you get to stay in your house. You do not make any payments to the lender during this time. However, if you move or when you die, the bank has first rights to the house. They will sell it and if there is anything left over from what they are owed, your heirs will get it.

    I do not think that these are get products but if your family wants the house, they should support the parent. The only reason that people take out these things is because they have no money.

    I think that it would be better for the person to sell the house and move somewhere smaller and cheaper.

  • 9 years ago

    It is difficult to summarize all the relevant rules for what the FHA calls a Home Equity Conversion Mortgage (HECM), which is what almost all reverse mortgages in the US are today. A reverse mortgage is a loan that allows homeowners 62 years of age and older to use their equity to generate tax-free income, without having to sell the home or take on a new mortgage payment. In fact the reverse mortgage is exactly what the title states, the reverse of a standard mortgage. In a reverse mortgage, the lender makes monthly payments to the borrower. However, in both a standard and reverse mortgage, the lender secures their loan amount by using the house as collateral. No monthly payments are due on the loan and the loan is repaid when the moves or sells the home, passes away, or ownership otherwise changes hands. The lender will require a borrower to continue making property tax and insurance payments.

    You mentioned inheritance. According to the FHA, "When a HECM loan becomes due and payable as a result of the mortgagor’s death and the property is conveyed by will or operation of law to the mortgagor’s estate or heirs (including a surviving spouse who is not obligated on the HECM note) that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property."

    What does this mean? If you are a homeowner's heir and want own the property, you must pay either the mortgage balance or 95% of the appraised value of the mortgaged property, whichever is less. You must pay the lender a lump sum out of your own pocket, or qualify for a new loan that pays the balance owed. If there is equity in the home, after the reverse mortgage balance is accounted for, it makes sense for the heirs to sell the home rather than let it go into foreclosure.

    A reverse mortgage is neither a good nor bad idea. Each homeowner has different circumstances and financial goals. What is right for one homeowner might be a terrible idea for another. The FHA's mandatory HECM counseling helps homeowners decide if a reverse mortgage meets their needs.

  • Misty
    Lv 5
    7 years ago

    A reverse mortgage is a loan that converts equity into a loan without having to give up the title to their home.

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  • 9 years ago

    As I understand it the bank makes payments to the owners and when they die the house goes to the bank.

  • 9 years ago

    Easy, some sucker signs up to take very little money for a very small period of time and allow a bank to take their home from their family when they die.

  • Mortgage is a legalized act,it hurts nobody if used properly.For a good understanding ,please contact your legal adviser.

    Source(s): Law
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