Reverse Mortgage FAQs: Your Questions Answered
By: Courtney Jorstad
August 21, 2023 • 12 minute read
Reverse mortgages have become an increasingly popular option for older homeowners looking to supplement their retirement income. However, many people still have questions about how they work and whether they are the right choice for them.
For that reason, we have put together this list of some of the most asked reverse mortgage FAQs. Click on any questions below, and it will take you to the answer you are looking for:
- How Does a Reverse Mortgage Work?
- What Are the 3 Types of Reverse Mortgages?
- Who Qualifies for a Reverse Mortgage?
- What Types of Homes Qualify for a Reverse Mortgage?
- How Old Do You Have to Be to Get a Reverse Mortgage?
- Who Owns the House in a Reverse Mortgage?
- Can I Get a Reverse Mortgage on My Vacation Home?
- How Much Money Do You Get from a Reverse Mortgage?
- What Is the Interest Rate on a Reverse Mortgage?
- How Do You Pay Back a Reverse Mortgage?
- What Is the 60% Rule for Reverse Mortgages?
- How Much Equity Do You Need for a Reverse Mortgage?
- When Does it Make Sense to Get a Reverse Mortgage Loan?
- What Is the Downside to a Reverse Mortgage?
- Are Reverse Mortgages a Scam?
- Can You Sell a House with a Reverse Mortgage?
- What Happens to a Reverse Mortgage a Homeowner Passes Away?
What is a Reverse Mortgage?
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). The reverse mortgage is a federally backed loan that is only available to homeowners who are 62 years of age or older and who have significant equity in their homes.
A reverse mortgage allows homeowners to borrow against the equity in their homes without requiring monthly payments to pay it back as would be expected with a traditional mortgage, a home equity loan, or a home equity line of credit (HELOC).
Reverse mortgages are regulated by the U.S. Department of Housing and Urban Development (HUD) and insured by the Federal Housing Administration (FHA).
Go here to learn more about reverse mortgages.
How Does a Reverse Mortgage Work?
When someone takes out a reverse mortgage, the first thing the loan proceeds will be used for is to pay off the current existing mortgage, if there still is one. This is one of the ways that a HECM loan eliminates the monthly mortgage payments.
For the remaining equity, the borrowers will have the option to receive their funds as a lump sum payment, monthly installments, a line of credit, or some combination of those options.
Borrowers can keep their reverse mortgage as long as the house is their primary residence, they keep the home in good condition, they continue to pay the property taxes, they continue to pay the homeowners insurance, and they continue to pay any other required fees, such as HOA fees.
The reverse mortgage is paid back when the home is sold, the home is no longer the principal residence or other requirements are not met, or when the homeowner passes away, in which the heirs will have to decide what they want done with the home.
Go here to read more about how a reverse mortgage works.
What Are the 3 Types of Reverse Mortgages?
While the most common type of reverse mortgage is the HECM reverse mortgage, there are three types of reverse of reverse mortgages:
- Single-Purpose Reverse Mortgage. Single-purpose reverse mortgages, also known as property tax deferral programs and deferred payment loans, are a type of reverse mortgage available only to homeowners aged 62 or older. These mortgages can only be used for one specific purpose, which must be approved by the lender. Typically, they are approved for expenses such as property taxes, home insurance premiums, and home repairs and renovations. Single-purpose reverse mortgages are obtained through state and local government agencies and non-profit organizations, but availability varies by state.
- HECM Reverse Mortgage. A HECM reverse mortgage is a federally backed loan available to homeowners aged 62 or older with significant equity in their homes. A reverse mortgage does not require monthly payments to pay it back. The funds from a reverse mortgage are used to pay off any existing mortgage and can be received as a lump sum payment, monthly installments, a line of credit, or a combination of these options. As long as the borrower continues to live in the home, maintains the property, pays property taxes, homeowners’ insurance, and other required fees, they can keep the reverse mortgage.
- Proprietary Reverse Mortgage. Proprietary reverse mortgages, also known as jumbo reverse mortgages, are a type of reverse mortgage developed by individual lenders for homeowners who want to borrow more money and have a home worth more than the FHA limit. These mortgages are similar to HECM reverse mortgages but are not backed by the federal government. Homeowners can receive their funds as a lump sum, monthly payments, a line of credit, or a combination of these options.
There is a fourth option that falls under the HECM reverse mortgage category known as a HECM for purchase. A HECM for purchase, also known as a reverse mortgage for purchase or H4P, allows borrowers to finance part of the purchase of a new home with a reverse mortgage.
Go here to learn more about the reverse mortgage types.
Who Qualifies for a Reverse Mortgage?
Reverse mortgages are only available to homeowners who meet the following requirements:
- At least one of the homeowners is at least 62 years old.
- The homeowners have significant equity in their home.
- The home is the primary residence.
- The home is in good, maintained condition.
- The homeowners are current on property taxes.
- The home is a qualifying property type.
- The homeowners are able to continue to pay the homeowners insurance and any required fees such as HOA fees.
Go here to learn more about qualifying for a reverse mortgage.
What Types of Homes Qualify for a Reverse Mortgage?
The following types of homes qualify for a reverse mortgage:
- Single family homes
- Two-to-four unity properties in which the homeowners live in one of the units
- Manufactured homes built after June 1976 that also meet HUD’s requirements
- FHA- approved condominiums
- Townhomes
Go here to learn more about what types of properties qualify for a reverse mortgage.
How Old Do You Have to Be to Get a Reverse Mortgage?
In order to get a HECM reverse mortgage or a HECM for purchase, you have to be at least 62 years of age.
Some lenders offer their propriety reverse mortgages to homeowners as young as 55 years of age. The age that borrowers are able to obtain these mortgages varies by state.
Who Owns the House in a Reverse Mortgage?
One of the myths about a reverse mortgage is that the bank owns the home. This is not the case.
When a borrower takes out a reverse mortgage, the home still belongs to the homeowners in the same way that borrowers who take out a regular mortgage or home equity loan still own their home.
This also means that the borrowers are still responsible for the obligations that come with homeownership such as paying property taxes, paying home insurance, and maintaining the home.
Can I Get a Reverse Mortgage on My Vacation Home?
A reverse mortgage can only be obtained on homes that are the principal residence of the homeowners. For this reason, a reverse mortgage cannot be used on a secondary residence such as a vacation home or investment property.
How Much Money Do You Get from a Reverse Mortgage?
The amount of money you will be able to get from a reverse mortgage will be based on the age of the youngest borrower, the home value, and the current interest rates.
The FHA puts a limit on how much homeowners are able to borrow from a reverse mortgage. The current FHA lending limit as of 2023 is $1,089,300.
If a borrower has a home with equity that is much more than that, they may qualify for a jumbo reverse mortgage. Most lenders allow qualifying homeowners to borrow up to $4 million with a jumbo loan.
Go here to learn more about how much money you can get from a reverse mortgage.
What Is the Interest Rate on a Reverse Mortgage?
The interest rates on reverse mortgages go up and down just like they do for traditional mortgages. They also vary depending on whether you have a fixed rate or an adjustable rate.
Reverse mortgage interest rates are not published in the same way that interest rates are published for traditional forward mortgages. In fact, HUD publishes reverse mortgage interest rates two months after the rates were active. That means that any data you are looking at today is at least two months old.
According to the data provided by HUD, here is the average of the most recently published interest rates for May 2023:
- All interest rates: 7.015%
- Fixed interest rates: 6.384%
- Adjustable interest rates: 7.016%.
Go here to learn more about how reverse mortgage interest rates work.
How Do You Pay Back a Reverse Mortgage?
A reverse mortgage is typically paid back when the borrower decides to sell the home, and the proceeds from the sale go toward paying off the loan.
If the home is worth more than the loan, you will get to keep that money. If the loan balance is more than what the home is worth, there is a protection that comes with reverse mortgages that guarantees that you will never owe more than 95% of the home’s appraised value.
While a reverse mortgage is not paid back in the form of monthly mortgage payments like a traditional mortgage, there is no penalty if borrowers decide they want to start making payments toward the balance.
Borrowers could also pay back a reverse mortgage by refinancing the mortgage.
What Is the 60% Rule for Reverse Mortgages?
The 60% limit rule has to do with how much money borrowers are allowed to withdraw in the first year of the loan.
HUD implemented a policy in 2013 that restricts borrowers from receiving more than 60 percent of the reverse mortgage proceeds as a lump sum payment in the first year of the loan after paying off the original mortgage, if there is one. Once the borrower receives the 60 percent payment, no further disbursement of funds will be made that year.
However, if you choose to receive at least part of your funds as a line of credit, you can withdraw the remaining 40% starting in the second year that you have the loan.
How Much Equity Do You Need for a Reverse Mortgage?
There is no exact equity percentage required to obtain a reverse mortgage. The amount will vary depending on the lender you work with and other factors such as the age of the youngest borrower and the current interest rates.
That being said, it is generally recommended that homeowners have a minimum of 50% equity in their homes. However, if you believe your home equity is below that amount, it’s always a good idea to talk to a reverse mortgage loan officer to verify whether you qualify or not.
Go here to talk to one of our featured reverse mortgage lenders.
When Does it Make Sense to Get a Reverse Mortgage Loan?
A HECM reverse mortgage used to be considered an option of last resort, but in recent years that has started to change.
A HECM reverse mortgage may be a good option for older homeowners in a variety of scenarios including but not limited to the following:
- Those who want to stay in their current home for at least five years.
- Those who have a large amount of equity in their homes
- Those who are looking to supplement their retirement income
- Those who want to do major home renovations.
Retirement expert Dr. Wade Pfau says that a reverse mortgage can be used “as part of an overall efficient retirement income plan,” and that homeowners may want to consider taking one out earlier than later.
“Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed,” Pfau explained.
Pfau says that one of the ways a reverse mortgage can help retirees is if the market is in decline when heading into retirement. Homeowners can use their reverse mortgage to support them while they wait for the market to recover and their retirement accounts to grow sufficiently.
Go here to read more about how to use a reverse mortgage as a retirement tool.
What Is the Downside to a Reverse Mortgage?
The main downside of a reverse mortgage is that homeowners give up a large portion of their home equity.
A reverse mortgage is a loan that is borrowed against the equity in the home. This means that when it comes time to sell the home, the homeowners won’t walk away with as much profit as they otherwise would if they didn’t touch the equity.
Another downside to a reverse mortgage is that it may make it more difficult for children to inherit the home. While homeowners with a reverse mortgage can still leave the home to their heirs, the heirs would have to pay off the remaining balance of the reverse mortgage before assuming ownership.
Homeowners will always have to weigh the pros and cons of a reverse mortgage to make sure that it is the right decision for them.
Go here to read more about the pros and cons of a reverse mortgage.
Are Reverse Mortgages a Scam?
A reverse mortgage is a legitimate financial product that is backed by the federal government. However, it is important to be aware of scammers out there who are trying to take advantage of homeowners in the name of reverse mortgages.
To protect against reverse mortgage scams, it is essential to deal with reputable lenders. Check customer reviews and unbiased platforms like the Better Business Bureau to gain a better understanding of their performance. By being vigilant and informed, homeowners can make sound decisions about their finances and avoid falling prey to scammers.
Can You Sell a House with a Reverse Mortgage?
Yes, you can sell a house with a reverse mortgage.
If you’re planning on selling your house, it’s always a good idea to reach out to your reverse mortgage lender and ask for the full payoff amount in writing. This way, you can make sure that the asking price will cover the loan.
What Happens to a Reverse Mortgage a Homeowner Passes Away?
One question that is important to consider is what will happen to your reverse mortgage and home if you pass away. If there is a surviving spouse who is a co-borrower, they can continue living in the home and receiving benefits from the mortgage.
If the surviving spouse is not a borrower, they may be able to stay under certain conditions.
When the last borrower dies, the lender will send notice that the loan is due and payable, and heirs have options such as selling the home or keeping it by paying the loan balance. Heirs typically have six months to settle the loan.
If you are considering a reverse mortgage, it’s always recommended to involve family members in the process, so they can know what to expect. It is also recommended that you consult with a financial advisor.
Go here to learn more about what happens to a reverse mortgage a homeowner passes away.
Next Steps
If you are ready to move forward with a reverse mortgage program, we recommend talking to a reverse mortgage lender. Get started with one of our featured reverse mortgage lenders here.
Interest Rates Last updated: 8/1/23
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
