Who Owns Your Home When You Get A Reverse Mortgage?
Many folks think that getting a reverse mortgage means they are selling their home to a lender for a reduced value and that the lender gets the benefit of the future appreciation of the home. This could not be farther from the truth.
Reverse mortgages are not scams. They are loans — a business agreement between the bank and homeowner.
When we get a reverse mortgage — just like when we get a traditional mortgage — the lender takes a security interest in the value of our home for any outstanding balance carried by the mortgager.
- With a traditional mortgage, you own the home even though you owe a lot of money at the outset of the loan. You simply pay off the loan amount over time until you eventually (hopefully) owe zero.
- With a reverse mortgage, you also own the home but you owe a smaller amount at the beginning of the loan and the amount you owe grows until you die or permanently move out of your home. You accumulate interest on the loan so you owe more when it is time to pay back the loan. The loan is usually paid back by selling the home.
With a Reverse Mortgage, You Get the Benefits of “Selling Your Home”
The misconception that the bank owns your home with a reverse mortgage is understandable — in a way it is similar to selling your home to a lender, but only a portion of it!
The reverse mortgage pays off your existing mortgage. You get access to your home equity now so you can live how you want today, without the obligation of making a monthly mortgage payment.
When we “buy” a new home, usually we put down 5 percent to 20 percent of the purchase price, so in essence the bank is buying most of our home, but letting us live in it while we pay them back with interest.
This is similar to what a reverse mortgage does, and if we have equity remaining at the end of the day when the house sells, it still belongs to us as the borrower or to our estates.
You Own the Home
I know what you’re thinking, you’re worried that having a reverse mortgage will restrict you from doing things like painting it a certain color, making renovations, renting out a room, or letting family member move in.
Again, that couldn’t be farther from the case. Does a regular mortgage restrict us from doing any of these things? NO!
With a reverse mortgage, you are clearly and legally the owner. You are on the title.
There are some restrictions on things like home based businesses and renting the home out while we aren’t living in it. This is because a reverse mortgage is designed to help retirees age in place — the house must always remain your primary residence.
You can think of it a bit like playing the game of Monopoly™ and those times in the game when you get into cash flow trouble. When that happens do we throw up our hands and yell “I QUIT!”? NO! We use our option of “mortgaging” Boardwalk or Reading Railroad, knowing eventually we will pass GO a few times and buy it back from the bank. When that happens, does the bank own your precious game card? Of course NOT! You hold the property because it still belongs to you.
If it is Not a Scam, Why Do I Pay So Much in Interest?
People sometimes believe that reverse mortgages are a way for banks to scam home owners out of their homes.
The reality is that no one is scamming anyone out of anything. But it is important to remember, that reverse mortgages are loans — a unique type of loan, but definitely a loan on which you will owe interest.
The business of banks is to give out loans and make money by charging interest on the borrowed amounts. Banks do make money on mortgages and reverse mortgages as well.
Interest on a Your Original Mortgage: Unless you paid cash, you probably purchased your home using a mortgage — money borrowed from the bank. And, you paid interest on that loan. In fact, you might not want to know this, but most of us have paid almost twice the original value of our homes in interest payments! For a $100,000 home with a 30 year mortgage, you will have paid $98,000 in interest payments at 5.25 percent interest — almost doubling the true cost of your home!
Interest on a Reverse Mortgage: When you get a Reverse Mortgage, you are again borrowing money. And you will be accumulating interest on the borrowed amount. However, instead of making mortgage payments every month, the interest on the loan — and the loan amount — comes due when you die or permanently move out of your home.
A reverse mortgage is not a low income charitable benefit. A reverse mortgage is a highly regulated loan program — not unlike traditional mortgages.
If it is Not a Scam, Why Do I Get So Much Less Than the Full Value of My Home?
You can never borrow the full value of your home for two main reasons:
1) Your loan amount will grow over time through accumulated interest.
2) If you have an outstanding mortgage — if you owe money on your home now — the total reverse mortgage loan amount must be used to pay off that mortgage, leaving you free of monthly mortgage payments, but with access to less cash than you might like.
What If the Home Goes Up in Value? Who Owns the Appreciation?
The good news for both a traditional mortgage and a reverse mortgage is that our home’s value should be growing over time — that appreciation in value is yours no matter what kind of loan you have.
If you originally bought your home for $100,000 and the home is now worth $250,000, that $150,000 increase in value is entirely yours…
(It sometimes does not seem like the accumulation is yours because that increase in value must be used to pay off any outstanding balance on either a traditional or reverse mortgage loan.)
What Happens When the Reverse Mortgage Loan Comes Due?
Reverse mortgages usually come due when the owner dies. Sometimes the loans come due because the owner decides to relocate or their health demands that they reside permanently in an assisted living facility.
When the loan comes due, the full amount of the loan — money used to pay off the original mortgage, cash used and interest accumulated — must be paid off.
This loan amount can be paid off in a variety of ways: 1) refinanced back into a traditional mortgage, 2) other monies can be used to pay off the loan or 3) the home can be sold to pay off the reverse mortgage.
The good news is that you never owe more on the loan than the value of the home when the loan comes due. So, if you have accumulated so much interest that the loan amount is higher than the amount you can sell the home for, you only owe the value of the sales price.
As we know, we can’t take it with us, but we can make the most of it while we’re here. Reverse mortgages do enable us to use our home equity now, while we can enjoy it. Granted, it would be lovely to leave everything to our kids, but it would also be nice to enjoy them and our grandkids in our retirement too! It is our hard earned right to do something for our family and ourselves.
Those with reverse mortgages have eliminated monthly mortgage payments, and they are now enjoying their homes without the continuous worry of mortgage payments. The homes they have worked so hard to own are now taking care of them. Estimate your loan amount with a reverse mortgage calculator.