Reverse Mortgage

Reverse Mortgage

Reverse Mortgage

What is a reverse mortgage?

A reverse mortgage is a type of loan that allows homeowners to borrow against their home’s equity.

Most homeowners get what’s called a home equity conversion mortgage (HECM). A HECM loan is backed by the Federal Housing Administration and is only available through FHA-approved lenders.

Other types of reverse mortgages include single-purpose reverse mortgages, which are intended to be used for a specific purpose, such as home improvements, and proprietary reverse mortgages, which are funded by private lenders and typically benefit homeowners with high-value homes.

How does a reverse mortgage work?

A reverse mortgage differs from a traditional, or “forward” mortgage, because instead of making mortgage payments to their lender, homeowners receive money from their lender on a monthly basis, in a lump sum or through a line of credit.

As you make payments on a forward mortgage, your loan balance decreases and home equity increases. On a reverse mortgage, your loan balance grows and your equity shrinks. However, with both types of mortgages, your home is the collateral.

The reverse mortgage is eventually repaid upon your death or when the home is sold. This includes the amount borrowed, plus interest.

If you have a sizeable amount of equity in your home and are looking for some extra income, a reverse mortgage can help you access the funds you need. Depending on your circumstances, a reverse mortgage may be a good option to provide you with supplemental income for the rest of your life.

Reverse mortgage rules

You must meet the following general requirements to qualify for a reverse mortgage:

  • Be age 62 or older
  • Have at least 50% equity in your home, or own it outright
  • Live in the home as your primary residence
  • Have no delinquencies on federal debt, such as student loans or taxes
  • Demonstrate your creditworthiness as a borrower
  • Provide proof of assets or income to pay your homeowners insurance, property taxes and other ongoing expenses
  • Participate in a session with a reverse mortgage counselor

Pros and cons of a reverse mortgage

Many seniors today are realizing they don’t have the savings they need — and are putting off retirement because of it. A reverse mortgage can offer greater financial independence and more breathing room to enjoy their lives.

Still, there are benefits and drawbacks to borrowing against your home equity in this way:

Pros of a reverse mortgage

  • Keep your home
  • Maintain your standard of living
  • Enjoy extra income as long you live in your home
  • Income is tax-free
  • Get cash in a line of credit, lump sum or through monthly payments
  • No worries of going underwater (owing more than your home is worth)

Cons of a reverse mortgage

  • Lose your equity over time
  • Increase your debt load over time
  • Incur high upfront costs, such as a maximum $6,000 origination fee
  • Interest paid isn’t tax-deductible
  • Your heirs could lose your home after your death — unless they repay the loan
  • Income received can reduce your government benefits

Reverse mortgage FAQs

Is a reverse mortgage a good idea?

Reverse mortgages can be a good option for seniors with specific economic circumstances; other seniors might do better with another solution, such as borrowing a home equity loan or home equity line of credit. Everyone is different so it’s important to consider the key factors before moving forward.

For example, what if you die and your spouse is not listed as a borrower, or has not yet reached the age of 62?

In some cases, the surviving spouse is able to stay in the home for the rest of their life if they choose — even if they are younger than 62. That’s because the loan amount is actually based on the age of the younger spouse even if they are not on the loan itself. This way, if the spouse who borrowed the loan dies, the remaining spouse may be able to stay in the home without fear of foreclosure.

If you don’t plan on staying in your home for a long time, be sure to take a look at the loan origination costs. Those costs are paid upfront and can be costly. So if you think you may relocate, downsize or head to a nursing home in just a few years, you’ll want to consider whether these fees makes sense in the long run.

What are the typical reverse mortgage fees?

The minimum loan origination fee for HECM loans is $2,500, with an overall cap of $6,000. Other costs include appraisal and inspection fees, title search and insurance, surveys and recording fees. For more specific fee details, speak with your lender.

What happens to my reverse mortgage if I need to move to a nursing home?

Generally speaking, your reverse mortgage becomes due and payable once you move out of your home. But if you need to live in a nursing home for a short time (anything less than 12 months), you and your spouse — if they are a co-borrower — can keep the home and the reverse mortgage. If, however, you make a permanent move (12 months or longer) to a nursing home, you will most likely have to sell your home to repay your reverse mortgage.

What happens if my home is underwater when I die?

For HECM loans, you won’t have to pay more than the house is worth. If your heirs decide to sell your home to pay off the reverse mortgage, they would have to pay back an amount equal to the unpaid reverse mortgage principal balance or 95% of the home’s appraised value, whichever is less. The difference is covered by mortgage insurance.

What should I know about reverse mortgage scams?

Scams exist, and it’s important to be vigilant about identifying and avoiding them. Be wary of anyone contacting you with high-pressure sales tactics, or unsolicited visits from local contractors encouraging the use of reverse mortgage funds for costly home improvement projects. Read our guide to learn more about reverse mortgage scams.

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Author D Laidler

I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go.  I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.

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