"Non-Recourse" a Reverse Mortgage Cunsumer Protection

One of the things that we always explain to senior borrowers when they ask about reverse mortgages is that they are non-recourse loans. The next question is always, What is a non-recourse loan?. This is a very important feature of the reverse mortgage and I want to take a moment to explain just what non-recourse means and how that affects senior borrowers who get reverse mortgages.

Simply put, a non-recourse loan means that the lender has only your property as security for their loan they have no other way to obtain repayment of the principal and interest in the event something happens and your home is not worth enough to pay off the obligation including all interest and fees. Could this ever happen? The loan itself is designed utilizing actuarial tables and knowing when most borrowers will vacate their homes due to passing or other reasons. Some borrowers absolutely blow these tables out of the water living active productive lives many years beyond the average life expectancy. Also, while most properties appreciate and stay ahead in value of their loan balances, it is feasible that during times of extended downturns in values growing balances due to money borrowed, accrued interest and charges and longer than expected loans due to prolonged lives, etc. the balance of the reverse mortgage loan could grow to be greater than the value of the property.

While the interest rates are low, many don't think about it but if the rates were ever to increase sharply on the adjustable rate reverse mortgages, then equity would be eroded much more quickly as well (a good example of this is to check the difference between the HUD Home Equity Conversion Mortgage HECM or Heck-um and a propriety jumbo reverse mortgage with an interest rate nearly 4% higher and see how much more quickly the balance rises on the higher rate mortgage). This is where the non-recourse nature of the loan is so important, regardless of what you owe when the loan becomes due as a result of your moving out of the home or passing, you or your heirs can never owe more than your home is worth.

This means that you can live in your home for life, never make another mortgage payment, and never have to worry about passing an obligation on to an heir. In most scenarios, you still pass equity on to your heirs but it's nice to know that regardless of how much money you receive on your reverse mortgage, how long you live in your property, what the interest rates do, or what values do in the future, you or your heirs can never owe more money than the property is worth. That non-recourse feature is one of the kinds of security the reverse mortgage is known for.

By: Michael Branson