How Does a Reverse Mortgage Work? Understanding Servicing, Refinancing and Payoffs

When most seniors ask, “How does a reverse mortgage work?” they are really asking how to apply and qualify for a loan. For many seniors, qualifying is the simple part. To qualify for a federally-insured reverse mortgage, or Home Equity Conversion Mortgage, seniors must be 62 years of age, own an approved property, complete counseling and have a substantial amount of equity in their home.

To understand how does a reverse mortgage work, seniors must also understand what occurs after the loan closes. Reverse mortgages are rarely short term loans. Many seniors use these loans to remain in their homes mortgage payment free for the rest of their lives. Before making that commitment, seniors should understand what they are getting themselves into.

How Does a Reverse Mortgage Work in the Long Run?

Seniors who choose to receive their loan proceeds in monthly payments or as a line of credit will primarily deal with a loan servicer after closing their loan. Loan servicers are companies that manage borrowers’ accounts, disperse proceeds and collect payment. Once the account has been established, borrowers will receive regular statements from their servicer updating them on their loan balance, interest charges and other pertinent information. In return for this service, borrowers can expect to pay a small monthly fee which can be set aside from their loan proceeds.

As long as seniors have a reverse mortgage, they will also be expected to keep up with their homeowners insurance and property taxes. Borrowers whose loan agreement contains a “Repair Rider” will also be expected to complete all home repairs before the agreed upon date. Failing to adhere to these guidelines will push the loan into default. Understanding what it takes to maintain a reverse mortgage is essential to understanding how does a reverse mortgage work.

How Does a Reverse Mortgage Work Once the Loan Becomes Due?

With a reverse mortgage, borrowers can repay their loan at any time. Borrowers also have the option of refinancing their reverse mortgage should their needs change in the future. Seniors might refinance in order to switch their loan from a fixed interest rate to an adjustable rate, secure a lower interest rate or tap into additional equity. For a small fee, borrowers can also change their method of payment at any time. This does not require refinancing. Instead, borrowers can simply contact their lender to change their payment method--for example, from a monthly payment to a lump sum--for a small fee and avoid paying another set of closing costs.

When most seniors ask, “How does a reverse mortgage work?” many also want to know how they will repay their loan once it becomes due. Reverse mortgages do not become due until both borrowers pass away, sell their home or move into a long-term care or other facility. Once this occurs, borrowers or their heirs will be expected to repay the loan balance, which typically comes from the sale of the home.

In most cases, lenders give the estate three months to repay the loan balance. As long as the estate is working with the lender, they may be granted up to three 3-month extensions. Since reverse mortgages are non-recourse, seniors should also know that they cannot owe their lender more than their home is worth. This keeps repayment fair to all involved parties.