Imagine your home is worth $500,000, and you discover you have a $750,000 mortgage in the county records. Then you see a second mortgage also for $750,000. Do you owe $1.5 million?
No. Those recorded amounts are understandably startling, but they are not your loan balance.
A Home Equity Conversion Mortgage (HECM) works differently from a traditional mortgage. Borrowers are not required to make monthly principal and interest payments. As they draw funds and interest and mortgage insurance accrue, the balance can grow. The mortgage documents therefore need to secure future advances and future interest accrual as well as the amount borrowed at closing.
Imagine for a moment that the reverse mortgage was recorded using the initial loan balance. That action would prevent the borrower from being able to draw more of their equity in the future. And we don’t want that.
Ultimately, the recorded figure is based on the loan’s maximum claim amount (MCA), which is the lesser of the home’s value or the HECM limit when the case number was assigned. Then, because most states require a maximum principal amount to be listed in the mortgage, HUD’s model documents instruct lenders to enter at least 150% of the MCA. If the MCA is $500,000, that produces a recorded amount of $750,000.
WHY ARE TWO MORTGAGES RECORDED AT THIS AMOUNT?
With an adjustable-rate HECM, the first note and security instrument secures advances from the lender. The second secures payments HUD may make to the borrower if needed. The two recorded $750,000 amounts do not mean the borrower received two $750,000 loans. Rather it allows two entities to give the borrower more money over time.
There is a practical reason for the 150% limitation. Federal regulations prevent a disbursement by a lender that would push the balance beyond a Maximum Mortgage Amount stated in the security instruments.
For a borrower, the clearest explanation is:
“That amount describes what the mortgage documents can secure. It is not what you owe today, but this figure allows you to borrow more in the future. Your actual balance reflects loan advances and accrued charges, and we can review that balance together.”
A careful borrower is right to ask. But the best practice is to show them the actual balance, explain the two recordings, and give the large number its proper context before the scheduled loan closing.