What is a Non-Recourse Loan?

A reverse mortgage is a unique financial product available to 55+ (age requirements can vary depending on reverse mortgage products), which enables homeowners to access a portion of equity in their homes, without having to pay monthly principal and interest payments (you are responsible to pay property tax, homeowner insurance, and maintenance). This could be a great solution for seniors who have a lot wealth and equity built up in their homes but need some help with CASH FLOW during retirement.

Some people have prior MISCONCEPTIONS ABOUT REVERSE MORTGAGE. This is mostly because in the past, some bad actors gave the product a bad name. However, reverse mortgages have changed meaningfully over time and today’s version of the product comes with strong borrower protections and safeguards. One of those protections is called the Non-Recourse.

This is the guarantee that no matter what happens to your home price, or economy, or the mortgage balance, as long as you maintain your obligations under the mortgage contract (like paying property taxes and home insurance), the most you’ll ever owe when it comes time to pay the mortgage off, is the fair market value of your home.

This segment explains the power of this product feature to give you, as a potential reverse mortgage customer, peace of mind.

Since reverse mortgages require no regular monthly mortgage payments, interest is simply added to the balance. This means that the mortgage balance will increase over time. Home value could appreciate, which might result in home equity continuing to grow over time even with reverse mortgage in place. Home equity could continue to grow over time even with a reverse mortgage in place!

The Home Value “Chart”

The pie chart illustrates the relationship between home value, the reverse mortgage balance, and home equity. Quite simply:

Home Value (Current appraised value) – Reverse Mortgage Balance= Home Equity

$500,000 – $200,000 = $300,000

So, for example, if your home were worth $500,000 and the reverse mortgage balance was $200,000, you would have $300,000 of equity in your home.

Negative Equity

In the rare scenario where the reverse mortgage balance was to eventually catch up to the home value – for example, if home prices were to drop significantly in your area – the amount of equity in your home could theoretically become negative.

Using the example above, if after 20 years the mortgage balance had grown to $400,000, but the value of the home dropped to $350,000, using the formula above

Home Equity = $350,000 – $400,000 = $(50,000)

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What Would Happen Without a Non-Recourse Loan (the Home Equity Guarantee)?

With other products like HELOCs, if the mortgage balance were to exceed the home value, the borrower could be on the hook to pay the lender for the negative equity of $50,000. This can pose serious financial problems for those who don’t have enough income or cash flow to cover that bill.

Reverse mortgages have solved this problem with the Non-Recourse Loan.

Guarantee of Non-Recourse

If the reverse mortgage balance is less than the value of your home, then the Guarantee of “Non-Recourse Loan” doesn’t come into play. When it comes time to pay off the mortgage, the outstanding balance is what you’d pay.

But if the mortgage balance were to be higher than the value of your home, that’s when the Guarantee of “Non-Recourse Loan” would kick in.

Simply, the amount you’d owe would be capped at the value of your home.

In the example above, all you’d owe would be $350,000, not the full $400,000.

Peace of Mind, Even if Rarely Needed

Negative equity might not happen for reverse mortgages because:

The loan amounts offered at the outset are conservative in comparison to the value of the home
Since real estate prices are trending upward in most markets, home appreciation often outpaces the growth in the mortgage balance

However, many reverse mortgage customers get comfort out of knowing they can set it and forget it (charges such as property tax and homeowner insurance, and HOA must still be paid). They and their loved ones will never be stuck with a bill when it comes time to pay off the reverse mortgage (means never owe more than the loan balance or the value of the property, whichever is less; or in other words No assets other than the home must be used to repay the debt). This means peace of mind.

Could a Reverse Mortgage Be Right for You?

Hundreds of thousands of Americans realizing just how wealthy they are, when they consider the value, they’ve built in their homes. They’re using their home equity (reverse mortgage) to improve their quality of life in retirement, and pay for things like:

Keeping up with expenses
Giving a living inheritance to their loved ones
Paying for renovations
Pay off existing debt
Supplement income
Have a Line of Credit for rainy days
Feel more secure for comfortable life
Cover Medical and health care expanses
Long needed and well-deserved vacation
Investment

If you’re interested in learning more about reverse mortgage or you prefer to take advantage of a free consultation with no obligation, please contact me at (650)430 7886 or email me at mike@michaelparsi.com to set up an appointment.