How Does a Reverse Mortgage Work?
A reverse mortgage works like any other kind of mortgage having to do with real property. The bank or lender provides a loan to the borrower which is secured by the property. The difference between a reverse mortgage and a typical mortgage or a “forward” mortgage is How and When you pay the loan off — otherwise the two mortgages are the same.
With a typical forward mortgage you must begin making monthly principle and interest payments immediately after the loan is secured with the goal of paying off the entire loan in, usually, 30 years.
With a reverse mortgage You Do Not Have To Make Monthly Payments But You Must Pay Off The Loan when you sell the property or your next of kin must pay if off after the borrower dies.
That is the difference. In the meantime, interest continues to accrue even though the borrower is not making monthly payments. Hence, the balance of the loan goes up instead of down — that is why it is called a “reverse” loan.
Title or ownership is unaffected for either mortgage type; although it is much easier to default on a regular mortgage if you start missing payments. That is not an issue with a reverse mortgage because the borrower does not have to make monthly payments. He or she just has to make sure they pay their property taxes and home owners insurance on time.
With a reverse mortgage — if the house is not sold first — the lender allows next of kin six months to one year to pay off the loan after the borrower passes. Family members typically do that by refinancing and keeping the property for their own use, or they sell the property and pay off the loan that way and keep the balance of funds for themselves. The lenders do not care how they get paid back just as long they get paid back. It’s important to examine all of the pros and cons of a reverse mortgage when considering this type of loan for your own situation.
With a reverse mortgage there is no penalty to pay off a reverse mortgage at any time after the loan is secured. The “notion that you lose title or the bank owns the property for reverse mortgage borrowers is completely untrue”. Just like the bank doesn’t own the property for people who secure a forward mortgage.
Unlike many loans, however, a reverse mortgage is a non recourse loan, which means that the borrowers (or next of kind) can never owe more money than what the property is worth when the loan is due. That is a very good thing, especially for jumbo reverse mortgages in California. These loans are also insured by the federal government who keep tabs on the lenders to make sure they play by the rules.