Not All Reverse Mortgages Are Created Equal
There’s an important distinction to be made about the reverse mortgages I blog about and other reverse mortgages you hear about on the news.
The reverse mortgages I blog about are insured by the Federal Housing Administration.
This means a couple of things:
FHA-insured reverse mortgages are non-recourse loans, meaning your heirs are not responsible for repayment, even if you pass away. With forward mortgages, or home equity lines of credit, however, your heirs incur the debt if you were to pass away. While it’s essential that you, as the borrower, benefit from the substantial cash flow boost a reverse mortgage can offer, it’s also important to consider what you will be leaving behind if you chose not to get a reverse mortgage. On top of your passing, your heirs will be held responsible for any and all of your debts.
Additionally, borrower(s) have to pay a Mortgage Insurance Premium which ensures that you never owe more than the value of your home when the reverse mortgage must be repaid. Without it, you might find yourself in hot water in the future…
For example, you take out a reverse mortgage loan right now at a value of $300, 000. In ten years, you pass away and the loan, plus interest and fees, must be repaid in full. If the loan has balloon to a $950,000 in that time, and your loan isn’t insured by FHA, your heirs are responsible for the full amount. In short, your heirs would be responsible for paying an extra 650,000 dollars. If the loan is insured by FHA though, you do not owe more than the current value of your home.
Any difference is covered by FHA.
The “horror” stories you read about and hear about in various news sources, are private reverse mortgage loans, uninsured by FHA. This meaning you are responsible for repaying the full loan amount, above the current value of your home.
In addition, while I cannot ascertain that private reverse mortgage loans are not non-recourse loans, I also cannot say that they are non-recourse loans. It’s important that borrowers do their research and look over any and all documents before the loan’s closing to make sure they understand the parameters under which they are borrowing the funds.