Kevin Michael Melody
Thinking in Reverse
Updated: Jul 7, 2020
The simplest way to begin to understand the concept of a Reverse Mortgage is to eliminate the modifier from its name. That's right, it's just a Mortgage. So...
What is a mortgage? It's a type of loan.
And what is a loan? It is a contract granting a temporary right to use something.
Now let's think in reverse. (Pun intended!)
A bank can loan you money. A loan is always temporary. So you have to pay that money back at some point.
If the terms of the loan of money give the bank the right to sell your home to satisfy the debt if you don't repay the money loaned, then they call the loan a mortgage.
And if the terms of that mortgage prohibit the bank from requiring repayment of the loan in any form until after you die, then they call it a Reverse Mortgage.
It's really that simple! A reverse mortgage is nothing more than a particular type of mortgage and, as such, it shares all the same essential features as a mortgage. So, if you've ever had a mortgage, then you can probably answer this question correctly:
True or False? When you get a mortgage the bank becomes the owner of your home.
That statement, of course, is absolutely false. Getting a mortgage does not mean you are selling your home to the bank. It just means you're getting a loan of money from the bank and offering your home as security for the loan. A reverse mortgage is just another type of mortgage, so it works exactly the same way: the bank loans you money and you put up your home as security for the loan. You do not have to give up ownership of your home when you get a reverse mortgage.
So, what about all these stories of people losing their homes because of reverse mortgages?
Let's eliminate the modifier again and see if you can answer it yourself: What about all these stories of people losing their homes because of mortgages?
Removing the word "reverse" once again brings clarity. A reverse mortgage is a mortgage, and all mortgage contracts contain terms that allow the lender to foreclose on your home if you: 1.) stop making payments, 2.) get behind on your property taxes, 3.) allow your insurance to lapse, or 4.) let your home fall into disrepair to the point where is it uninhabitable. A reverse mortgage is no different in this respect, except that no monthly payments are ever required. So, in that respect, a reverse mortgage could actually be considered less risky than a traditional mortgage.
Okay... So, if a reverse mortgage is just another type of mortgage, then why would I choose a reverse mortgage over a conventional one? There are several benefits, but the most attractive and useful one is that you don't have to make monthly payments on the amount you borrower or pay off the principal balance at all during your lifetime.
A reverse mortgage is unique in that there is no specific date when the balance must be paid in full. Instead, repayment is triggered by one of three events that could take place at any time:
All borrowers named on the contract have passed away.
The property is sold.
You move to another home and no longer occupy the property as your primary residence.
Here it is again in a nutshell:
A reverse mortgage is a loan of money.
Your home guarantees the loan.
Interest accrues but it does not have to be paid until the entire loan comes due.
The loan will never come due during your lifetime, as long as: 1.) you occupy the home as your primary residence, 2.) you pay your property taxes on time, 3.) you keep your home insured and, 4.) you maintain your home in a livable condition.
Check out the articles below for more information on how a reverse mortgage can be used to enhance your retirement: