I recently read an interesting article by James E. Veale of Security One Lending on Reverse Mortgage Daily titled “Are Reverse Mortgages Really Income?” The main thrust behind the article is that several reverse mortgage professionals are misusing the term “income” to describe the proceeds of a reverse mortgage. This misuse of terminology can really tarnish the professionalism of the reverse mortgage industry. James does however point out that California Civil Code 1923.5 does refer to reverse mortgage proceeds as income.
“A REVERSE MORTGAGE IS A COMPLEX FINANCIAL TRANSACTION THAT
PROVIDES A MEANS OF USING THE EQUITY YOU HAVE BUILT UP IN YOUR HOME,
OR THE VALUE OF YOUR HOME, AS A SOURCE OF ADDITIONAL INCOME.”
So what’s the difference between income and loan proceeds? Well, income doesn’t need to be repaid, whereas reverse mortgage proceeds will need to be paid back, including interest, servicing fees and accrued mortgage insurance premiums.
Our company acknowledges that in the past we had used the term “income” to describe the proceeds of a reverse mortgage. There may still be press releases of ours floating around that used that terminology. We now refer to the proceeds of a reverse mortgage either as “proceeds” or “cash flow.” We feel these terms will better serve our clients and the industry as a whole.
This is not the only major misuse of terminology that I have heard. One that really irks me is when a reverse mortgage originator states that the borrowers unused line of credit will “earn interest.” That couldn’t be further from the truth. Yes, the unused portion of the line of credit will grow each year and more money will become available to you, but just because it “grows” doesn’t mean that you are earning interest.
The book “Reverse Mortgages For Dummies” has printed that you earn interest on the money you haven’t yet borrowed. That’s wrong.
“Line of credit (HECM, Home Keeper, Cash Account): A line of credit (also called a credit line) works very much like a savings account. You have access to the entire loan amount, but since you have to send in a form to get it, people are often more mindful of how their money is spent than they may be with a lump sum. In addition, depending on the loan, you can earn interest on the money you haven’t yet borrowed.”
So, what do we learn from these linguistic follies? A reverse mortgage is a complex program. As a senior searching for answers, find a true professional: one that can guide and educate you on all aspects of the loan. You should work with a member of NRMLA (National Reverse Mortgage Lenders Association). They are an organization that promotes professionalism and ethics in the reverse mortgage industry.
For more information visit: Reverse Mortgage Information