There are many misconceptions about reverse mortgages and how they work. The fact is a reverse mortgage is a loan that allows homeowners age 62 or older to borrow against the equity they have in their primary residence. The answer to the question, “Does the bank own your house with a reverse mortgage?” is a simple “no.” With a reverse mortgage, the title of the home remains in the borrower’s name.
Proceeds from a reverse mortgage can be used as a down payment on another property, or as income to cover monthly expenses. How the loan is used is up to the borrower.
Who Owns the Home?
Taking out a reverse mortgage does not mean that the owner is selling their home or transferring ownership. A reverse mortgage allows borrowers to access a portion of their equity in the home and convert it to cash. It’s a loan with some unique attributes, but the bank does not own the home.
You, as the owner, retain the title on the property and the loan does not need to be repaid as long as you live up to the terms of the loan, which typically include:
- Paying property taxes
- Maintaining the home by keeping up with repairs
- Paying homeowner’s insurance
- Living in the home as your primary residence
If the borrower doesn’t meet these requirements, the loan will be in default and the lender can foreclose on the property if the borrower doesn’t take action to correct the violation, just as with a traditional mortgage.
How Does a Reverse Mortgage Work?
A traditional mortgage requires the homeowner to make payments to a lender to pay off the debt. With a reverse mortgage, the lender makes payments to the homeowner. As the homeowner receives reverse mortgage payments, their equity in the home declines, and the loan balance increases. Interest, fees and mortgage insurance premiums are also added to the loan balance over time.
A reverse mortgage may make sense for homeowners whose wealth is primarily tied up in their real estate. According to the National Reverse Mortgage Lenders Association, as of late 2020, there was approximately $8.05 trillion in home equity held by homeowners over age 62 who could qualify for a reverse mortgage.
Can a Reverse Mortgage be Repaid?
Because a reverse mortgage is a loan, it must also be repaid like any other loan. Typically, the home is sold, and the loan is repaid, with the owner or the estate receiving any excess.
If the homeowner dies and a family member wants to take ownership of the home, they can choose to pay off the reverse mortgage themselves. But heirs are never personally liable for the debt. Should the home depreciate, heirs are not responsible for any shortfall.
In the end, you own your home, and that doesn’t change with a reverse mortgage. You aren’t giving up the deed to your home or your options. What you do with your home, as with your retirement, is up to you.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.