A reverse mortgage can be instrumental in helping older homeowners pay their bills, make home improvements and repairs or just maintain a quality of life. Reverse mortgages have been around in some form since the 60’s but have only recently come into the main stream with the likes of Tom Selleck pushing them in commercials. Although these loans have been viewed with distrust in the past by the media and financial planners, demand for them has increased as the mystery behind them has been brought to light. A reverse mortgage can provide a quick solution for people over 62 who are House wealthy and cash poor and need to supplement their retirement or pay for long-term care. However, it is important to understand the basics on how they work, and what happens when you sell the home.
With a traditional mortgage, you borrow money from a lender, make monthly payments and pay down the balance owed. Overtime you decrease your debt, and your home equity increases until the mortgage is paid off and you own your home. A reverse mortgage works, well, in the reverse. Instead of the borrower making monthly payments to the lender the lender makes monthly payment to the borrower. Your equity decreases while the balance owed on your home increases. Unlike a traditional mortgage a reverse mortgage may not have a set maturity date (the date the loan must be paid back). With a reverse mortgage, the loan usually reaches maturity when: the borrower dies, the borrower sells the property, the borrower moves from the home or the borrower fails to provide reasonable upkeep or pay property taxes.
Selling a home with a reverse mortgage is just like selling any other home with an outstanding debt. The lender has first right to the proceeds to recoup the outstanding balance on the reverse mortgage (unless there is also a lien on the home for unpaid taxes) If the equity remaining in the home is greater than the outstanding loan balance the seller will receive the difference. When selling a home with a reverse mortgage it is important to know how much is owed on the reverse mortgage. Because the borrower is typically paid in monthly installments the mortgage principal increases while equity decreases. That makes it possible that loan amount could exceed the resale value. Therefore, if you’re thinking of selling your home with a reverse mortgage contact me (your real estate agent) and I will help you determine the payoff.
If extenuating circumstances force you to sell your home with a reverse mortgage and the value of the property has fallen below the amount owed you may need to conduct a short sale. Fortunately, reverse mortgages are considered nonrecourse loans so the lender cannot go after the seller or their heirs for the difference between the loan amount and the final sale price. Short sales always require the lenders approval so it is important to get your real estate agent working on this as soon as possible.