For older Texans feeling the strain of trying to make ends meet, reverse mortgages provide some welcome relief. Reverse mortgages allow homeowners who are 62 or older to tap into the equity they have built up in their homes as a source of additional income. A reverse mortgage is a mirror image of a regular mortgage: the borrower receives, rather than makes, monthly payments, and the debt increases rather than decreases over the term of the loan. “Most borrowers use funds from a reverse mortgage to pay off debt or to purchase something they otherwise could not afford,” says Dr. Jack C. Harris, research economist with the Real Estate Center at Texas A&M University.
“Because these loans are particularly appealing to older homeowners who have substantial equity in their homes, a reverse mortgage might be defined as the bank pays and granny stays.” With a reverse mortgage, the borrower can choose to receive a lump sum of money at closing or monthly payments. If monthly payments are chosen, the principal balance of the loan (the amount owed) increases with each disbursement and interest accrues. The borrower makes no payments during the loan term. Also, the borrower may pay all origination expenses from loan proceeds. The term of a reverse mortgage is indefinite. The loan comes due when the borrower no longer needs the home as a residence. In most cases, this is when the borrower dies, chooses to move or enters a health care facility on more than a temporary basis. The loan is fully repaid when the borrower sells the home. The lender may take the home, which is pledged as collateral, to satisfy the debt but may not take any other assets, no matter how large the loan balance becomes. A borrower cannot be foreclosed upon for missing a payment, as there are no payments, Harris says.
However, it is possible to default on a reverse mortgage contract. A default could precipitate the sale of the home. This could occur if the borrower commits fraud, by providing false information to get the loan, for example.
Other reasons for defaults include failing to keep the home in good repair, failing to pay taxes assessed against the home, failing to insure the home or creating a lien with higher priority than the reverse mortgage. Failing to pay a repairman who then creates a vendor's lien is an example of the last circumstance. In any of these instances, the loan becomes due immediately. The homeowner has the option to repay the balance of the loan or let the lender sell the home to satisfy the debt. To learn more about reverse mortgages, including specifics of the Federal Housing Administration (FHA) and Fannie Mae varieties, see Harris’ article “Reversal of Fortune” in the April 2004 issue of Tierra Grande magazine. The Real Estate Center at Texas A&M University has been providing solutions through research for more than 30 years. Funded primarily by Texas real estate licensee fees, the Center was created by the state legislature to meet the needs of many audiences, including the real estate industry, instructors, researchers and the general public.