When a reverse mortgage lender advertises that the loan is "FHA-insured," it might not mean what you think it means.
I was reminded of this last night when I was watching "Louie" on demand and I was prevented from skipping the commercials. Apparently, Comcast believes that my wife and I are elderly because the ads were about hair loss, CPAP supplies and reverse mortgages.
One reverse mortgage advertisement bugged me. It included a line about how you can feel safe getting a reverse mortgage because the loan is FHA-insured. It bothered me because the assertion is true but misleading.
Why "FHA-insured" is misleading
The ad is disingenuous because it leads you to believe that you're safe with a reverse mortgage because the loan is insured. The truth is this: The FHA insurance protects the lender, not the borrower. The FHA insures the lender's safety, not the borrower's (or the borrower's heirs).
Reverse mortgage insurance is like any other mortgage insurance: The borrower pays for it, but the lender is the beneficiary.
What reverse mortgage insurance does
A reverse mortgage is a loan, with the home's equity as collateral. The borrower gets a lump sum or periodic draws, and the loan accrues interest. The lender is repaid after the borrower dies or moves out of the house. Often, the owner or heirs pay off the reverse mortgage by selling the house and giving the proceeds to the lender.
I'll repeat a key point: The loan accrues interest while the borrower lives in the house.
Reverse mortgages in the past 10 years
|Fiscal year||Number of loans|
|Fiscal year 2014||Number of loans 23,325|
|Fiscal year 2013||Number of loans 60,091|
|Fiscal year 2012||Number of loans 54,822|
|Fiscal year 2011||Number of loans 73,131|
|Fiscal year 2010||Number of loans 79,106|
|Fiscal year 2009||Number of loans 114,692|
|Fiscal year 2008||Number of loans 112,154|
|Fiscal year 2007||Number of loans 107,588|
|Fiscal year 2006||Number of loans 76,351|
|Fiscal year 2005||Number of loans 46,131|
Source: National Reverse Mortgage Lenders Association
The lender is betting that the borrower will die or move out of the house before the accumulated interest exceeds the home's value.
Here's an example
Let's say you have a home worth $200,000, and you get a reverse mortgage for $100,000. The lender looks at its actuarial tables and guesses that you'll stay in the house another 12 years, and by that time you will have racked up $60,000 in interest. Your or your heirs will then sell the house for $200,000, then pay off the $160,000 loan balance.
Where reverse mortgage insurance comes in
But let's say that the actuarial tables don't reflect your particular circumstances. You stay in the house much longer than 12 years, and by the time you move out to live in a nursing home, the accumulated principal and interest add up to $220,000. You sell the house for $200,000 and you give all the money to the lender. But the lender has a $20,000 shortfall.
That's where reverse mortgage insurance kicks in. The lender files an insurance claim and the FHA gives the lender the $20,000 difference between the loan balance and the proceeds from the home's sale.
Taking a different perspective
If you look at it from the other end of the telescope, it's possible to conclude that reverse mortgage insurance protects the borrower, because the borrower doesn't have to pay any more than the house is worth and the heirs aren't stuck with paying off the shortfall.
Just keep in mind that when a lender tells you that a reverse mortgage is FHA-nsured, it's reminding you that you're paying an insurance premium for which the lender is the beneficiary.