Two reasons why reverse mortgages have no fixed duration.
A reverse mortgage is one way a senior citizen can use the equity in their home to supplement their retirement. The borrower receives a set monthly or yearly amount until he no longer lives in the house. A reverse mortgage has no fixed duration and the bank is paid back from the sale of the house.
Why Reverse Mortgages Have No Fixed Duration?
These mortgages are intended to supply lifetime income and so can have no fixed termination as long as the borrower lives in the home. The mortgage terminates when the owner dies, sells the home or enters managed care. Reverse mortgages are based on life expectancies called actuaries. The borrower must be at least 62 years old to qualify for a reverse mortgage. Generally the borrower will not exhaust the equity before he dies and the mortgage terminates. The bank recovers the money and makes a profit from the sale of the home. It is the same principle that allows life insurance companies to make money because most people pay in more than their beneficiaries collect. The bank and insurance companies take a small risk that is offset by the number of people who pay in more than they receive.
Insurance
Because a reverse mortgage has no fixed duration, in rare cases, a homeowner/borrower does receive payments in excess of the market value of his home. The borrower is entitled to continued payments even if the total payments exceed the value of the home. The banks have protected themselves by requiring the borrower to buy and maintain an insurance policy that pays the bank the difference between the money paid out and the home’s value. If, for example, the borrower dies with $250,000 reverse mortgage balance and the home is sold for $200,000, the insurance covers the $50,000 difference.
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