Does A Reverse Mortgage Equal A Loss Of Control?

As a reverse mortgage loan officer in California, I am constantly amazed by seniors who are under the impression that a reverse mortgage will make them lose their home. However, I am sympathetic to their concern because, in the ’70s and ’80s, there were reverse mortgages that were almost like giving up title to your home.

This article addresses the common concern that many who are unfamiliar with the modern reverse mortgage have: “Am I just signing over the title to my home to the bank?”

For many people, hearing “reverse mortgage” make them think of a cartoonish bank manager, laughing his way back to the bank as he carries the deed to a poor old lady’s home. What will happen to her? How will she pay her bills? That mean banker just took away the home from another innocent victim!

Fortunately, with the modern reverse mortgage, such a scene could not be farther from reality. Reverse mortgages in California and other states are regulated by the Department of Housing and Urban Development (HUD). HUD now issues the rules for the most popular reverse mortgage programs, and the rest of them copy those programs to a large extent. Early reverse mortgage programs that were not subject to HUD’s scrutiny did in fact share some equity with the lender, but few of those programs remain today.

The majority of reverse mortgages today are the FHA (HUD) Home Equity Conversion Mortgage, or HECM. With HUD making the rules, and the Federal Housing Authority (FHA) insuring it, the HECM is another government assistance program for those over 62 years old, such as Social Security or Medicare. The difference is that the HECM is not funded by other people’s payroll taxes, but is funded by the senior’s home equity, which of course only the senior uses for their own benefit. As is common to all FHA-sponsored mortgage programs, reverse mortgages are obtained through FHA-approved lenders, such as FutureSafe Financial in California.

Reverse mortgages are fair and simple exchanges: the bank lends money to the homeowner (the “reverse” part) in exchange for a mortgage on the home. A mortgage is the only way that the lender can ensure that it is repaid. This type of mortgage allows the bank to be repaid only after the homeowner passes away or moves out. At that point the lender collects only the money that it lent to the senior.

Of course, there is a trade off, or at least an exchange, to the transaction. The senior homeowner will have less equity in the future than they otherwise would have had without the reverse mortgage. That does not however, mean that the equity in the home will be depleted, or even necessarily decline. In many cases, modest home price appreciation will out pace the amount of equity that the senior uses. With the promise of no mortgage payments for as long as the senior lives in the home, the exchange may well be worth it.

As you probably now understand, seniors do not relinquish any control over their home by obtaining a reverse mortgage. The reverse mortgage is simply a financial tool that has benefits and trade offs. Every senior homeowner in California should evaluate it based upon their own situation. If we can be of any help in this regard, please do not hesitate to contact us.