Video TranscriptThe two biggest misconceptions around reverse mortgages are these: one, the bank is going to take my house; and two, there won't be anything left for the kids to inherit. Let's cover these two misconceptions.
There is what's called a lien on the title. This means that when you leave your home and sell it, or pass away, the home will be sold. Whatever the balance of the loan is gets paid off, and whatever is left goes to your heirs. It's no different than if you had a regular mortgage.
If you have a regular mortgage and you pass away, the kids have to make the mortgage payment each month until the place is sold. So if the house takes longer to sell, making those payments could be a burden on the heirs. With a reverse mortgage, if you were to pass away, you have one year to sell the home — and there is no house payment during that year.
Now let's talk about the idea that the kids will have nothing to inherit. Let's say your house is worth $600,000 and you have an existing mortgage of $200,000. You did a reverse mortgage, and we eliminated that existing $200,000 mortgage — so now you don't have a house payment. You still pay your property taxes, your fire and hazard insurance, and keep your house up, but that regular mortgage payment — let's say it was $1,500 a month — is gone.
Every month, the payment you would have made gets added to the reverse mortgage balance. At the end of the month the balance is a little higher, and at the end of the year it's higher. If the reverse mortgage balance ever grows to more than your home is worth and you pass away, your heirs and your estate are not responsible for the difference. So if by some chance you owe $700,000 and the house drops in value to $400,000, you are not responsible for that $300,000 difference — that is what the FHA mortgage insurance covers.
A note on appreciation: yes, the reverse mortgage balance goes up over time, but in California, if you look at a 70-year average, real estate tends to appreciate over the long haul at about 4.6% per year. Some years homes go up much faster, some years they dip a little — but over the long run let's use 4.6%. So what's really happening is that the balance is rising, but the value of the house is rising too.
So we might get to a point where, say, 10 years from now you move out and the reverse mortgage balance is up to $300,000 — but the house has appreciated over those 10 years and is now worth $800,000. You started with the house worth $600,000 and owed $200,000, so you had $400,000 in equity. Now you owe $300,000 but the house is worth $800,000 — so that equity piece is $500,000.
One last point: yes, if you didn't put any loan on there, your kids would inherit more. But the bank is not going to lend you all the equity in your house. The bank will lend you approximately 50%, and the other 50% stays in your house as equity.
And remember — your house is still your house when you do a reverse mortgage. The reverse mortgage lender is not buying your house. The amount they let you borrow, no matter how little, is just money the bank is letting you borrow. It's only a loan, like any other loan.
