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Hampton Roads Estate Planning and Administration Law Blog

Tuesday, January 1, 2019

Reverse Mortgages and Older Americans

Perhaps you’ve seen the catchy commercials for a reverse mortgage stating that many older Americans are struggling to get by because they currently do not have enough in savings and retirement funds to manage their expenses, but yet many have equity in their homes. To solve the financial difficulties, the commercial recommends using a reverse mortgage to access that equity.

Suppose you’re one of the many individuals such commercials are targeting. You’re struggling financially but have significant equity in your home – perhaps you paid off your mortgage ten years ago. How exactly does a reverse mortgage help you?

At a basic level, a reverse mortgage is a loan from a bank secured by your house – just like a regular mortgage. The primary difference is that for a reverse mortgage, you receive a lump sum payment or continuous payments from the bank and do not make payments on the principal balance. Whereas in a regular mortgage you take out a loan and then make monthly payments, a reverse mortgage doesn’t require any payments to be made until a specified event occurs, such as your death, the sale of the property, or another event identified in the loan agreement.

What about interest?

Interest still accrues in a reverse mortgage. However, you do not make recurring principle or interest payments. Thus, if you take out a reverse mortgage, your outstanding principal balance will continue to rise as interest accrues.

If interest accrues, what happens if the principal balance exceeds the home’s value?

Federal regulations ensure that the debtor cannot be liable for the difference if the principal balance exceeds the home’s value when repayment is required. When making a reverse mortgage, the bank is taking the risk that the principal balance may exceed the home’s value. There are two reasons that the principal balance can exceed the home’s value. First, the individual may live longer than anticipated and thus interest accrues in excess of the home’s value. Second, a market downturn can cause the home’s value to drop below the principal balance.

What should I do if I’m interested in a reverse mortgage?

The reverse mortgage can be a great option for many older Americans who have significant equity in their homes, but they are complex financial instruments that should be carefully considered.

 


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