How Does a Reverse Mortgage Work?

By now, you have undoubtedly seen one of the countless commercials for a reverse mortgage in California — usually hosted by a sitcom star of yesteryear — that promises to be the answer to all your problems. A reverse mortgage allows you to take money out of your home while still retaining ownership of it, and not have to worry about the long-term repayment of the loan. And while, in general, that’s the gist of how a reverse mortgage works, the reality of a reverse mortgage is a little more complicated. Here, we’re going into a little more detail on how a reverse mortgage works.

Reverse Mortgage Education: A Beginner’s Guide describes a reverse mortgage, or a California Home Equity Conversion Mortgage, very simply: it’s a home equity loan designed for older homeowners. While it does not require repayment of the loan while the homeowner is still alive, the loan must be repaid after the borrower moves out, or passes away.

Who Would Benefit the Most with a Reverse Mortgage?

Because of the nature of the reverse mortgage in CA, it works best for a certain type of homeowner. Namely:

  • A homeowner that does not plan to move out of the house, and can maintain the operating costs of the home, but still requires additional income to help with expenses.
  • A homeowner that needs the money for an emergency expense.
  • A homeowner that wants to access the equity in the home without having to worry about repayment while s/he is still alive.

What Are the Requirements for a Reverse Mortgage?

Of course, as with all loans, there are stipulations that go along with a reverse mortgage. There’s a lot more to getting a reverse mortgage than just turning a certain age. For example:

  • You must either own your home outright, or be able to pay off the balance of the mortgage on your home at the closing of your reverse mortgage.
  • You must demonstrate the ability to pay all the extant expenses on your home — this includes, but is certainly not limited to: taxes, homeowner’s insurance, HOA fees (if applicable), and any state and county fees associated with the home.
  • You must live in the home, and keep it as your primary residence. Investment homes and vacation homes are not eligible for reverse mortgages.
  • While your spouse may or may not be 62 years of age, if s/he is not of age to qualify for a reverse mortgage, s/he may not be listed on the loan.
  • Regardless of the current value of your property, the HECM limit on your reverse mortgage is $625,000.
  • Once you die, or move out of the home, the entire value of the reverse mortgage must be paid back. This responsibility will fall on your surviving spouse (if any), and/or your heirs, and usually requires them to sell the property. However, any proceeds that remain after the reverse mortgage is paid off will go directly to them. That may help them, in the long run, from paying exorbitant estate tax fees. You should talk with your accountant or another bank professional to see how exactly it would work in your case.

Is a Reverse Mortgage Right for You?

No two people have exactly the same needs. If you would like to know if a reverse mortgage, or a CA HECM, is the right choice for you, contact Senior Advantage Association (SAA) today.