Reverse mortgage

Key Takeaways

• A reverse mortgage pays the homeowner instead of the lender, and the balance grows as advances and accrued interest are added to the debt.
• Repayment is triggered by an event rather than a maturity date: the borrower dies, transfers the dwelling, or stops occupying it as a dwelling.
• HUD’s Home Equity Conversion Mortgage dominates the market and requires a borrower at least 62 years old plus counseling from a HUD-approved agency.
• Washington regulates these loans directly under the Washington state reverse mortgage act, RCW 31.04.500 through 31.04.540, enforced by the Department of Financial Institutions.

What It Means

A reverse mortgage runs an ordinary home loan backward. Rather than the borrower paying the lender down toward zero, the lender advances money to the borrower as a lump sum, a line of credit, or monthly payments, and the balance climbs as those advances and the interest on them pile onto the debt. The borrower keeps title and keeps living in the home, and no monthly loan payment is due.

What the borrower is spending is Equity. Every advance and every month of accrued interest converts a slice of ownership into cash, the mirror image of Amortization, where payments shrink the debt and grow the owner’s share. A Home Equity Loan taps the same equity but demands repayment from the first month, which is the practical difference most borrowers care about.

Repayment here is triggered by an event, not a date. The loan comes due when the borrower dies, transfers the dwelling, or stops occupying it as a dwelling. The Home Equity Conversion Mortgage, the federally insured product that dominates the market, requires a borrower to be at least 62, to occupy the home as a principal residence, and to complete counseling with a HUD-approved agency. Property taxes, insurance and upkeep stay the borrower’s job throughout.

How It Works in Washington

Washington regulates reverse mortgages by name. RCW 31.04.500 provides that RCW 31.04.501 through 31.04.540 may be known and cited as the Washington state reverse mortgage act, and RCW 31.04.505 defines a reverse mortgage loan as a nonrecourse consumer credit obligation secured by a consensual security interest in the borrower’s dwelling, with principal, interest, or shared appreciation due and payable, outside of default, only after the consumer dies, the dwelling is transferred, or the consumer ceases to occupy the dwelling. In practice the security instrument is a Deed Of Trust, the same one used for a forward loan.

The counseling requirement has teeth. Under RCW 31.04.515 a lender may not accept a final and complete application or assess any fee on a prospective applicant without first receiving a signed counseling certification, and the same section keeps temporary absences from the home of up to one hundred eighty consecutive days from making the loan due and payable. RCW 31.04.530 requires a plain-language notice in bold sixteen-point type or larger within three business days of a completed application. RCW 31.04.525 requires the Department of Financial Institutions to preapprove any proprietary reverse mortgage product, a step that does not apply to a federally administered product such as the HECM. A lender that defaults on the loan terms and fails to cure owes treble damages under RCW 31.04.535.

One Washington closing cost drops away. RCW 61.24.157 assesses an $80 foreclosure prevention fee on residential mortgage loans but exempts any reverse mortgage loan made to a person 60 years of age or older.

Example

Ellen is 74 and owns a Tacoma house worth $600,000 free and clear. She completes counseling with a HUD-approved agency, the lender receives the signed certification required by RCW 31.04.515, and she draws $180,000 on a HECM at 7 percent.

No payment is due, so the interest compounds onto the balance. After five years she owes $255,172.55, which is the $180,000 she drew plus $75,172.55 of accrued interest. Because she is over 60, the $80 foreclosure prevention fee in RCW 61.24.157 was never assessed at her closing.

Ellen then moves in with her daughter for good. Ending her occupancy makes the loan due, and the house sells for $660,000. After $39,600 of selling costs (6 percent) and the $255,172.55 payoff, $365,227.45 goes to Ellen. Had the balance instead grown past the sale price, the nonrecourse rule in RCW 31.04.505 would have left her owing nothing more.

Common Mistakes and Exam Traps

• The age 62 floor comes from HUD’s HECM program, not from Washington statute. Washington’s own reverse mortgage act sets no minimum age.
• Age 60 shows up in Washington law for a different purpose: RCW 61.24.157 exempts a reverse mortgage made to a person 60 or older from the $80 foreclosure prevention fee.
• The borrower keeps title. A reverse mortgage is a loan secured by the dwelling, not a sale of the home to the lender.
• No monthly loan payment does not mean no obligations. Failing to pay property taxes, keep insurance, or maintain the home can still put the loan in default.