What is a Reverse Mortgage?

The most common type of reverse mortgage used is the Home Equity Conversion Mortgage (HECM). A HECM reverse mortgage is a financial tool available to homeowners who are 62 years of age or older. As the name implies, it allows homeowners to convert their home’s equity into cash.

Must be at least 62 years old.

You receive money as a lump sum, monthly payments, line of credit, or combination of the three.

You decide how to use the money.

You don’t pay back as long as you live in and maintain the home.

You will never owe more than the loan balance or 95% of the appraised value (whichever is less).

How Does a Reverse Mortgage Work?

The first thing a reverse mortgage does is it pays off the current mortgage and eliminates the monthly mortgage payments for the borrower.

The second thing it does is give homeowners money based on four factors: the age of the homeowner, the value of the home, the interest rate, and the current mortgage balance.

Homeowners have three options for how they can receive the money: a lump-sum payout, a line of credit, monthly payments, or a combination of the three.

It is up to the borrowers to decide how they want to use the money. Homeowners have used the money for a variety of purposes including supplementing their monthly income, paying off debt, paying for home renovations, or as a backup plan in the form of a line of credit.

Homeowners may also use a reverse mortgage to purchase a new home. This is known as HECM for purchase or reverse mortgage for purchase.

The U.S. Department of Housing and Urban Development (HUD) puts a lending limit on how much borrowers can obtain from a reverse mortgage. The current limit for 2022 is $970,800. However, most major lenders offer proprietary jumbo loans that that would allow homeowners to borrow against a higher lending limit of $4 million.

reverse mortgage vs traditional mortgage

Reverse Mortgage v. Traditional Mortgage

A reverse mortgage is a loan just like a traditional mortgage except that borrowers are not required to make monthly payments to pay it back. Instead, the mortgage comes due once the borrower leaves the home because he or she decides to sell, the home is no longer the primary residence of the homeowner, the homeowner fails to pay property taxes or insurance, the home is not maintained in good repair, or the homeowner dies.

Just like a traditional mortgage, the home is used as security in order to obtain the loan and the home remains in the homeowner’s name. The bank does not own the home.

Homeowners are required to continue to pay property taxes and homeowners insurance, maintain the home, and live in the home as the homeowners’ primary residence.

With a reverse mortgage, interest and fees are added to the total balance on a monthly basis. This means that the mortgage balance increases over time.

Reverse Mortgage Protections

A reverse mortgage comes with several protections.

First, HECM reverse mortgages are insured by the Federal Housing Administration (FHA), and it is a non-recourse loan. This means that the borrower will never owe more on the mortgage than what the home is worth.

Second, before homeowners can officially file an application for a reverse mortgage, they must complete reverse mortgage counseling with a third-party HUD-approved counseling agency.

Other Types of Reverse Mortgages

Other types of reverse mortgages include a proprietary reverse mortgage and a single-purpose reverse mortgage.

A proprietary reverse mortgage is a private loan that is not FHA insured. Most jumbo reverse mortgages that lenders offer fall under this category.

A single-purpose reverse mortgage is only allowed to be used for one purpose and is typically obtained through a non-profit organization.

Want to learn more about reverse mortgages, check out our complete reverse mortgage guide.

If you are interested in pursuing a reverse mortgage, check out our list of recommended reverse mortgage lenders.

What is a Reverse Mortgage?