As a senior, your most significant asset may be your home. If money is tight in retirement, you may be interested in getting a reverse mortgage. Here, we'll discuss everything you need to know about reverse mortgages so you can make the best decision.
What is a reverse mortgage?
With a traditional mortgage, you take out a loan to finance a home and pay your lender back over time by making a monthly mortgage payment. A reverse mortgage works the opposite way -- instead of making a monthly payment, you receive payments based on your home equity. This option is only available to older homeowners who meet eligibility criteria, which we'll discuss below. You might also hear a reverse mortgage referred to as a home equity conversion mortgage, or HECM.
How a reverse mortgage works
With a reverse mortgage, you enter into an agreement where a lender pays you based on your equity in your home. Your lender doesn't take ownership of your home, and you're still required to cover the costs associated with it, like property taxes, homeowners insurance, and other maintenance costs or expenses. You can use the money from a reverse mortgage for any purpose -- it doesn't have to relate to your home.
As a borrower, you have a few options when it comes to receiving your reverse mortgage proceeds:
- A monthly payout, where you either have fixed monthly payouts for a specific number of years or monthly payouts for as long as you maintain the reverse mortgage
- A line of credit, which you draw from as needed, similar to a HELOC, that can be combined with a monthly payout
- A lump sum, where you get a single large payout at once
You'll need to consider your specific needs when determining which option is best for you.
Who qualifies for a reverse mortgage?
There are certain criteria you'll need to meet to qualify for a reverse mortgage, according to Steve Irwin, President of the National Reverse Mortgage Lenders Association (NRMLA):
- Age qualification: All borrowers listed on title must be 62 years old. If one spouse is under 62, it might be possible to get a reverse mortgage. However, the loan officer will need to collect additional information upfront to determine eligibility.
- Primary lien: A reverse mortgage must be the primary lien on the home. Any existing mortgage must be paid off using the proceeds from the reverse mortgage.
- Occupancy requirements: The property used as collateral for the reverse mortgage must be the primary residence. Vacation homes and investor properties do not qualify.
- Taxes and Insurance: Borrowers must remain current on property taxes, homeowners insurance, homeowners association fees, and any other necessary costs related to owning your property.
- Property Condition: Borrowers are responsible for completing mandatory repairs and maintaining the condition of the property.
- Property type: Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. Co-ops do not qualify.
- Debt: Borrowers must not have any outstanding federal debt you're delinquent on, like an unpaid tax bill.
- Counseling: Borrowers must take part in a reverse mortgage counseling session so you understand what you're signing up for.
How much money can you get from a reverse mortgage?
The amount of money you can get from a reverse mortgage loan depends on your age and the value of your home, as well as the current interest rate and the type of reverse mortgage you get. However, you shouldn't expect to get the cash equivalent of the full value of your home. Rather, you'll get just a portion of it.
How much does a reverse mortgage cost?
Just as there are closing costs associated with a regular mortgage, so too will you pay a number of fees when you enter into a reverse mortgage agreement. First, there's a loan origination fee, which is either $2,500 or 2% of the first $200,000 of your home's value -- whichever is higher. From there, you'll pay 1% for any amount of home value over $200,000. The maximum fee you'll pay is $6,000.
You'll also need to pay for an appraisal and a compulsory housing counseling session. Plus, you should factor in mortgage insurance premiums -- specifically, 2% at closing plus an annual fee equal to 0.5% of your loan balance.
You may also be on the hook for monthly loan servicing fees that top out at $30 for fixed-rate loans and $35 for adjustable-rate loans. And there may be some additional third-party fees you're charged at your lender's discretion.
Types of reverse mortgages
There are different reverse mortgage types you might choose from:
- Home Equity Conversion Mortgage (HECM). Offered through the Federal Housing Administration, this is the most popular type of reverse mortgage. You can use your HECM loan proceeds for any purpose.
- Proprietary reverse mortgage. This is a non-government-backed loan and may offer you a higher lump sum, especially if you have a lot of equity in your home and it's worth a lot.
- Single-purpose reverse mortgage. This is offered by nonprofits and state and local government agencies. This type of reverse mortgage is usually smaller and its proceeds can only be used for a single designated purpose, like renovating a specific part of your home.
Pros and cons of a reverse mortgage
A reverse mortgage is an excellent idea for some people -- but not everyone. Here are the pros and cons of getting a reverse mortgage.
Pros
There are some advantages to a reverse mortgage:
- Access the equity in your home without having to move out. With a reverse mortgage, you can use the equity you have in your home to ease whatever financial pressure you're under. Granted, you could sell your home and use the proceeds of the sale as an income source. But a reverse mortgage lets you stay in your home, and you can use the loan proceeds for any purpose you want.
- Payouts are not taxable. Payouts from a reverse mortgage are not considered taxable income.
Cons
On the other hand, reverse mortgages have their drawbacks.
- High fees. You'll pay high fees to close on a reverse mortgage, and the loan itself will reduce the amount of equity you have in your home.
- You could lose your home if you fall behind with payments. A reverse mortgage won't necessarily allow you to stay in your home. If you can't keep up with the costs of ownership, like property taxes and maintenance, you could be forced to sell regardless.
- The loan will eventually become due. A reverse mortgage is a loan that needs to be paid back one way or another. If you don't have the money to repay your loan balance and you pass away, your reverse mortgage lender can force the sale of your home to get repaid. That's not a good thing if you're hoping to leave your home to your heirs.
Avoiding reverse mortgage scams
The reverse mortgage industry has long been blasted for its predatory practices. In fact, low-income areas are often targeted in an effort to get desperate homeowners to sign up. To avoid falling victim to a scam, you're better off reaching out to lenders about a reverse mortgage rather than responding to unsolicited offers. You should also avoid signing any contracts or documents you don't understand. If you have questions about the process, reach out to the Department of Housing and Urban Development at 1-800-347-3735.
Is a reverse mortgage a good idea?
It can be. With a reverse mortgage, you get access to income without having to sell your home and move. If you're a senior homeowner with a lot of equity in your home, it could be an easy way to borrow. Just be aware of the drawbacks before moving forward. You may decide that you're better off with a home equity loan or line of credit than a reverse mortgage. Or, you may decide that the cost of owning your existing home is too high, even with those reverse mortgage payments. There's no right or wrong answer, so ultimately, it will boil down to your financial needs and what you're comfortable with.
Reverse mortgage resources from NRMLA
The NRMLA offers additional information and resources at ReverseMortgage.org, including:
- Reverse Mortgage Self-Evaluation: A Checklist of Key Considerations, which asks a series of questions to determine whether a reverse mortgage is the right option for you before you contact a lender;
- What You Need to Know About Your HECM After Closing, which explains the important role played by the reverse mortgage servicer after the loan closes and the borrower’s ongoing obligations; and
- What Do I Do When My Loan is Due?, which describes the end of loan process and the associated timelines and options for paying off the reverse mortgage.
Still have questions?
Here are some other questions we've answered:
- What Is a Second Mortgage?
- What Is a Home Equity Line of Credit (HELOC)?
- What Is a Joint Mortgage?
FAQs
A reverse mortgage is a loan that allows you to get paid by a lender based on the equity you have in your home.
With a reverse mortgage, you either receive a lump sum of cash, a line of credit, or monthly payments based on your home equity and other factors.
Like any loan, if you come into money, you can use it to repay a reverse mortgage. But most seniors take out a reverse mortgage because they're extremely strapped for cash, and so you may need to eventually sell your home to pay off that debt.
