Duhaime's Law Dictionary


Reverse Mortgage Definition:

A loan made by the homeowner on which the home stands as collateral, and which payment is not required until the homeowner sells, moves out or dies, and the loan amount and interest, is then paid out of the proceeds of sale.

Related Terms: Mortgage

In a June 2011 publication Seniors - Housing Decisions, the Government of Canada's Consumer Measures Committee describes a reverse mortgage using these words:

"In a conventional mortgage, a financial institution provides a sum of money to a borrower, and this loan is secured by the property or home that the borrower wishes to buy. The loan is paid off in instalments with interest, and the homeowner’s equity increases as mortgage payments are made.

"In a reverse mortgage, the lender advances a lump sum to the borrower or provides a set amount of money each month. The payment may be in the form of a line of credit, which can be drawn upon to a maximum amount monthly. Payments may also be received from an annuity, purchased with all or part of the lump sum.

"Some reverse mortgages require repayment after a fixed term of years, but most do not have to be repaid until the borrower dies or moves out of the house. At this time the entire loan must be paid back, plus interest. This is usually accomplished through the sale of the property.

"The proceeds from a reverse mortgage are not taxed because they are classified as a loan rather than income."

In Flores v Transamerica HomeFirst, Justice Stevens of the California Court of Appeal wrote:

"In a reverse mortgage the homeowner borrows against the equity in the home and makes no payment to the lender until the homeowner sells the house, moves out, or dies. The loan is then repaid out of the proceeds from the sale or through refinancing."

Similarly, in Black v Financial Freedom, Justice Haerle of the same court:

"Reverse mortgages have been described as a financial planning device for the elderly who are often house rich, but cash poor. A reverse mortgage can address this dilemma by providing a means for converting home equity into cash. In a reverse mortgage, as in a conventional mortgage, the mortgagee or lender advances money to the borrower or mortgagor. However, in a reverse mortgage the borrower is often times not obligated to repay any portion of the loan or the interest on the loan amount until the property is sold, the loan matures or the borrower dies or experiences an extended absence from the premises. The interest on the borrowed sums is added to the principal loan amount and the lender acquires a lien against the house in the amount of the initial principal and accumulated interest."

In their 2009 publication, American authors Frolik and Brown proposed this description of a reverse mortgage:

"(A) Reverse mortgage (is) a form of home equity conversion that permits the homeowner to borrow against the value of the home. The loan provides income to live on, and the mortgage is not repaid until the sale of the house or the death of the homeowner, or the owner means of permanently.

"Unlike (conventional) home equity loans (mortgages), a reverse mortgage involves no regular monthly payments by the homeowner.

"The homeowner can receive a lump sum loan and draw down on it as needed or use it to purchase an annuity that provides a monthly source of income.

"Alternatively, the homeowner can be supplied a fixed monthly sum by the lender until the total mortgage debt reaches a predetermined dollar amount."

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