These government-backed "for purchase" reverse mortgages are "no-recourse" loans, meaning if the borrower defaults, the lender's recovery is limited to the sale value of the house. For example, if real estate values have declined at the time the loan comes due, and the home no longer is worth as much as the amount loaned, the FHA pays the lender the amount of the shortfall.
HUD recently clarified that the borrower cannot choose between paying the loan balance or paying an amount equal to the value of the home. Instead, when the loan is due, the borrower must either pay the balance due or default on the loan, in which case the bank sells the house and uses the proceeds to satisfy the loan.
However, even if that happens, you or your heirs will never owe more than the value of the home.
HECM loans are available only through an FHA-approved lender.
There are numerous calculators on such sites as AARP and Golden Gateway Financial that can help you determine which reverse mortgage is best for you.
Further information, including a list of FHA-approved lenders, is available free from the FHA.
One added cost to a reverse mortgage is an extra insurance premium, usually more than a conventional mortgage, which has to be paid by the homeowner to insure the lender against the possibility the homeowner lives longer than anticipated, says Bachman.
The insurance guarantees you will never pay more than a stated amount despite increased borrowing costs over time. More than 90 percent of all reverse mortgages in the United States are also HECM loans insured by the federal government through HUD. The insurance applies to the FHA mortgages. This insurance is what makes a reverse mortgage more expensive than a conventional or straightforward mortgage.
On a positive note, interest rates on reverse mortgages today are similar to conventional mortgages. In addition, fees associated with a reverse mortgage cannot exceed 2 percent of the first $200,000 and 1 percent of the balance, with a maximum of $6,000.
There's another potential upside to having a reverse mortgage. "If the house appreciates in value, you benefit from the appreciation and can refinance the reverse mortgage for a higher amount and benefit from a larger revenue stream," Bachman says.