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Reverse Mortgages: A Cash Generating Finance Tool for Seniors
A Reverse Mortgage is a loan against home equity providing cash advances to a borrower, and requiring no repayment until a future time. Home equity means the value of a home minus any debts against it. But reverse mortgages are different from "home equity loans in two important ways:

  1) You do not need an income to qualify for a reverse mortage
  2) You do not have to make monthly repayments on a reverse mortgage

Cash advances provided by a reverse mortgage are referred to in various ways.
  1) Cash advances are also known as "loan advances", "payments", "disbursements", and in the case of line of credit reverse mortgages-"draws"
  2) Cash advances can be paid out in a single "lump sum" of cash, a series of "stream" of periodic advances (for example monthly, a line of credit that the borrower controls, or any combination of these type of advances.

Repayment of principal(cash advances), interest, and loan costs is not required until the borrower dies, sells the home, or permanently moves away.

The purpose and operation of a reverse mortgage are different from those of a standard "forward" mortgage.

  The purpose of a forward mortgage is to purchase a home.
  The purpose of a reverse mortgage is to generate cash.

  In a reverse mortgage the borrower's equity generally decreases over time. The loan balance (the amount owed)generally decreases over time. The loan balance rises as loan advances are made to the borrower, interest is added to the outstanding loan balance, and no repayments are made. Unless the home appreciates (grows in value) at more than a moderate rate, the loan balance starts "catching up" to the home value. Reverse mortgages are typically "rising debt, falling equity" transactions.

All reverse mortgages share certain common characteristics relating to homeownership, loan adavnces, loan cost financing, loan balances, repayment, and debt limits.

The borrower retains title to the home. The lender does not own the home, and does not "get" the home when the borrower dies. The borrower is still responsible for taxes, insurance, and upkeep. The borrower's estate must pay off the loan upon the borrower's death.
No repayment is required on most reverse mortgages for as long as the borrower lives in the home as a principle residence. When the last surviving borrower dies, sells the home, or permanently moves away, then the full loan balance becomes due and payable.

There is a "nonrecourse" limit on the borrower's repayment obligation. This imporatnt consumer safeguard means that the total amount owed by the borrower can never exceed the value of the home at the time the loan becomes due and payable. In seeking repayment, the lender does not have recourse to anything other than the home's value.
Even if the loan balance grows to be greater than the home's future value, the borrower's debt is limited to by the value of the home.
The non-recourse feature protects the borrower and the borrower's estate and heirs from "deficiency judgments," that is, from being required to pay back more than the home's value.

Montana Home Choice Coalition
Affordable, Quality Housing for Seniors, Adults, Children, and Families with Disabilities
© 2004