What is a reverse mortgage?
A reverse mortgage is a loan designed for older homeowners that allows them to convert part of their home equity into cash without incurring a monthly mortgage payment. Instead, the loan balance becomes due when the homeowner sells the home or passes away.
It is called a “reverse” mortgage because, rather than make payments each month toward the balance of the loan as a traditional mortgage borrower would, the lender makes payments to the borrower.
There are two types of reverse mortgages.
Note that both types of reverse mortgages are non-recourse loans, meaning that the borrower is never responsible for making up the difference should the loan amount eclipse the home’s value.
Home Equity Conversion Mortgages
Also known as HECMs, these loans are designed for homeowners 62 and older and are insured by the federal government. A key feature of the HECM is that it abides by the Federal Housing Administration’s loan limit, which was set at $725,650 for 2019. This means that homeowners with homes valued above this number cannot access more cash. HECMs were established in 1989 and are the most commonly used reverse mortgage.
Proprietary reverse mortgages
These types of reverse mortgages are insured by private lenders, and because of
this, they can accommodate homes with higher values and are often called “jumbo” reverse mortgages. Most – but not all – proprietary reverse mortgages also require borrowers to be 62 years old.
Propriety reverse mortgages are now offered by a handful of different leading reverse mortgage lenders in most states. Some offer features not available on a HECM, including the ability to retain a first lien on the property. And while they are similar to HECMs in most ways, one key difference is that they do not require borrowers to pay mortgage insurance – a requirement on the government-insured HECM product that can drive up costs.
How do I become eligible for a reverse mortgage?
To be eligible for a reverse mortgage, whether it is a government-insured HECM or a private offering from reverse mortgage companies, you must:
- Be 62 years old (although one private lender can accommodate borrowers as young as 60)
- Own your own home
- Live in this home as your primary residence
- Have a sufficient amount of equity in your home
Can I get a reverse mortgage if I have an existing mortgage?
Yes, many homeowners obtain a reverse mortgage in order to pay off an existing mortgage, therefore eliminating a monthly mortgage payment. The loan requires borrowers to pay off the first lien from the onset, and the remaining proceeds are theirs to access according to the disbursement structure of their choice.
Can I take a reverse mortgage if I am 62 but my spouse is not?
Yes, you can still take a reverse mortgage by applying for the loan alongside what is called a “non-borrowing spouse.” Because loan proceeds are calculated based on the age of the youngest borrower, including a non-borrowing spouse, you may receive less proceeds from the loan. However, because your spouse is included on the loan, he or she will be able to remain in the home should you pass away so long as the loan’s obligations continue to be met.
How does a reverse mortgage work?
When a homeowner takes a reverse mortgage, they agree to receive a portion of their home’s equity in cash or access it in a line of credit to be used at any time.
In exchange, the borrower agrees to the following obligations:
- To keep the home in good repair
- To pay property taxes and homeowner’s insurance
- To live in the property as their primary residence
The loan becomes due when the borrower:
- Decides to sell or move away
- Vacates the property for more than 12 consecutive months
- Fails to fulfill the obligations listed above
- Passes away
What happens to the loan if I decide to move?
A reverse mortgage for seniors allows the borrower to sell the home and repay the reverse mortgage at any time, just as they would a traditional mortgage loan. Once the loan balance is repaid, the borrower can keep the remaining equity and move on.
What happens to the loan if I pass away?
The heirs of the estate have two options:
1) They can sell the home, repay the loan balance and pocket any remaining equity.
2) They can keep the home by repaying the loan, possibly by refinancing into a new mortgage.
Because of the reverse mortgage’s non-recourse feature, the homeowners or their heirs will never owe more than 95% of the home’s appraised value, even if the balance of the loan exceeds this amount. This means that if the home appraises for less than the loan balance, 95% of that amount is all that needs to be repaid.
Why get a reverse mortgage?
There are several main reverse mortgage solutions that lead homeowners to take out this loan. Here are some of the primary factors:
1) The desire to age in place
For an older homeowner who intends to spend the remainder of their days in their current home, a reverse mortgage can make a lot of sense. Not only will the loan eliminate monthly mortgage payments, it can also provide a regular stipend to supplement income. Homeowners can also use the proceeds to finance home modifications to accommodate their needs as they age, or to pay for in-home care rather than move to a facility. For some, the loan can make it financially possible to live in their home as they grow older.
2) The need to increase cash flow in retirement
By eliminating a mortgage payment and accessing some of their home’s equity in cash, homeowners can significantly bolster their financial situation when living on a fixed income in retirement. As some have aptly said, “I spent years working to support my home, and now my home can support me.”
3) The goal to support a comprehensive financial plan
In recent years, reverse mortgages have been embraced as a tool that can be strategically leveraged in financial planning. In this scenario, borrowers establish a HECM line of credit to be drawn upon when needed, which allows them to avoid drawing upon other assets when they are underperforming.
When is a reverse mortgage a bad idea?
Reverse mortgages are not right for everyone, and it’s important to weigh reverse mortgage pros and cons to recognize when it’s not the right option for you. Two main reasons people opt not to pursue the loan is when they have a strong desire to leave their home free and clear to their heirs, or when they know they are likely to move in the near term, in which case the expense of taking the loan is simply not worth it.
How much money can I get from a reverse mortgage?
The proceeds from a reverse mortgage are calculated based on the following factors:
- The age of the youngest borrower (or non-borrowing spouse)
- The lesser of the appraised value of the property or the Federal Housing Administration’s maximum claim amount of $725,650
- The balance of any existing liens against the property
- Current interest rates
These factors are calculated to determine the amount of proceeds available through the loan, what is known as the “principal limit.” An online reverse mortgage calculator can help you determine your principal limit.
How can I access the funds?
Borrowers can choose between a fixed- or adjustable-rate loan and can access their proceeds in a number of ways:
- A lump sum at closing
- Monthly payments, either a tenure payment for the life of the loan or a term payment for a set number of years
- A line of credit
- A combination of a line of credit and monthly payments
Generally, borrowers can access up to 60% of their principal limit within the first year, unless there is an existing mortgage balance that exceeds this amount. When this is the case, borrowers can take enough to pay off their mortgage, plus an additional 10% of the principal limit in cash.
Common questions – and myths – about reverse mortgages
Does the bank take my house, or will I lose the title?
Reverse mortgage borrowers continue to remain on title throughout the life of the loan. As long as you uphold the obligations of the loan, the lender will not assume ownership of the property.
Will my heirs still be able to inherit the home?
Yes. Your heirs have the option to pay off the loan and assume ownership after your passing. In the event of your death, the servicer is notified and they will work with your heirs as they determine what they want to do with the property.
Could I be forced out of my house?
Keep in mind that a reverse mortgage is still a mortgage loan, so if the terms are not met, you could face foreclosure. But as long as you maintain the obligations of the loan – pay property taxes and homeowner’s insurance and keep the home in good repair – you will never be forced out of your house.
Is a reverse mortgage expensive?
Reverse mortgages do come at a cost, and this expense can be divided into two categories: upfront and ongoing costs. Upfront costs include counseling, an origination fee, an appraisal fee, an initial mortgage insurance premium and third-party closing costs. Most of these fees can by rolled into your loan balance. Ongoing costs include an ongoing mortgage insurance premium, the loan’s interest and a monthly servicing fee. Your loan specialist will provide you with all the reverse mortgage information you need to determine the exact cost of your loan so that you can decide if the option is too expensive for you.
Can I still receive Social Security and Medicare?
Yes, a reverse mortgage will not impact your ability to obtain Social Security or receive Medicare payments. However, it should be noted that it might impact certain means-tested programs, like Medicaid and Supplemental Security income benefits.
How to get started
If you decide to pursue a reverse mortgage, here’s how you can get started:
Step 1: Talk to your family members or children.
Most people have misconceptions about reverse mortgages, so it’s important to ensure that all involved family members are informed about your decision and educated about the loan from the onset, especially as the loan may impact your heirs. They are likely unaware of the reverse mortgage solutions you can achieve through this type of specialized financing.
Step 2: Do your research.
There are many different reverse mortgage lenders out there, and the products and rates they offer can vary. You can find a lender in your area by searching the National Reverse Mortgage Lenders Association’s online lender directory. Also, a number of mortgage company review sites publish customer satisfaction info that can help you learn more about reverse mortgage companies and make an informed decision.
Step 3: Go to reverse mortgage counseling.
Financial counseling with an independent, reverse mortgage-certified counseling agency can help you review reverse mortgage pros and cons, obtain more reverse mortgage information and explore alternatives before committing to a lender. Counseling typically costs about $125. Family members are welcome to attend too, and most counseling sessions can be done over the phone.
Here’s a general rundown of the reverse mortgage loan process that summarizes what a borrower can expect:
- Connect with a reverse mortgage professional for an initial discussion. This includes the use of a reverse mortgage calculator to determine how much money you may be eligible for.
- Receive a pre-counseling package with reverse mortgage information.
- Undergo HECM counseling with an independent counseling agency.
- Complete the application and sign disclosures with the assistance of your reverse mortgage professional.
- Schedule an in-home appointment with a certified appraiser.
- Wait while your loan file is submitted for processing and underwriting. Know that your reverse mortgage professional may come back to you with questions from the underwriter.
- Attend a closing to finalize the loan.
- Meet your loan servicer, who will handle any issues throughout the life of your loan. This is the person you can contact with questions should they arise at any time.