Recently, a couple I consulted had completely incorrect information about reverse mortgages. They believed that the bank would take their home or that ownership would transfer the moment they applied. Such misunderstandings are not uncommon. When we look at the actual structure, the story is entirely different.

A reverse mortgage is a product that allows homeowners aged 62 and older to borrow funds using the equity in their home as collateral. Unlike a traditional mortgage, where payments are made monthly, the lender provides funds in a lump sum, monthly payments, or a line of credit. Ownership remains intact, and the loan principal and interest are repaid when the home is sold, the owner passes away, or the home is no longer used as the primary residence. The most common product is the HECM, Home Equity Conversion Mortgage, which is the only type of reverse mortgage insured by the federal government.

Looking at the recent market, the housing values in the San Fernando area remain at a level worth considering for utilizing funds. According to Zillow, the average home value in San Fernando is $676,787, which is a 0.8 percent decrease from the previous year. While it falls within a relatively accessible price range in Los Angeles County, long-term homeowners are likely to have a significantly higher equity than when they purchased their homes.

The eligibility requirements are clear. You must be at least 62 years old, the home must be your primary residence, and if there is an existing mortgage balance, it must be at a level that can be paid off with the reverse mortgage loan. You must also pass a financial assessment to ensure you can continue to pay property taxes and insurance. This is where misunderstandings often arise. Taking out a loan does not eliminate the obligation to pay property taxes. The average effective property tax rate in California is 0.71 percent, which is lower than the national average, but failing to pay it can lead to default.

Cost considerations also need to be addressed. With origination fees, mortgage insurance premiums, and initial costs around 2 percent plus an annual rate of 0.5 percent, the upfront costs are higher than a traditional mortgage. Since the structure reduces home equity over time, it's important to consider that the assets left for heirs may decrease accordingly. However, due to the non-recourse loan structure, if the home value falls below the loan balance, heirs are not required to pay the difference.

A reverse mortgage is not the only option. Products like Home Equity Lines of Credit (HELOC) also utilize equity, but in this case, the obligation to make monthly payments remains. For retirees with variable income, this repayment burden can be problematic. In contrast, a reverse mortgage does not require monthly payments but reduces equity, presenting different trade-offs. Which option is right depends on income structure and future plans.

The method of receiving funds is also a common area of misunderstanding. It's not just a one-time lump sum; you can receive a fixed amount monthly, use a line of credit as needed, or choose a combination of both. The portion left in the line of credit grows over time if not used, so there's no urgent need to take it all at once, which was one fact this couple was unaware of. Additionally, just because the consultation is completed doesn't mean the loan is immediately approved; an appraisal and financial assessment must be conducted to determine the actual loan limit.

As of 2024, the percentage of the population aged 65 and older in California is projected to be 16.5 percent, and this is expected to increase. In this context, having accurate information is crucial. HECM requires mandatory counseling from a HUD-approved counseling agency before applying, where any misunderstandings can be addressed. Before making a decision, it's advisable to discuss with family and thoroughly review the counseling results. This article is not investment or legal advice, and consulting a professional before entering into any contract is recommended.