For homeowners age 62 and older, a reverse mortgage may provide a way to access a portion of the equity built up in a home without requiring monthly mortgage payments.
But reverse mortgages work very differently from traditional mortgages, and they aren't the right solution for everyone.
Before deciding whether a reverse mortgage makes sense, it's important to understand how the loan works, how you receive the proceeds, what happens to your home equity, what expenses you're still responsible for and when the loan eventually has to be repaid.
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). HECMs are available to eligible homeowners age 62 and older.
What Is a Reverse Mortgage?
A reverse mortgage is a loan secured by your home that allows eligible homeowners to convert a portion of their home equity into loan proceeds.
Unlike a traditional mortgage, where you generally make monthly principal and interest payments that reduce the amount you owe, a reverse mortgage generally does not require monthly mortgage payments from the borrower.
Instead, interest and applicable fees are added to the loan balance over time. As a result, the amount owed generally increases rather than decreases.
This is an important distinction: a reverse mortgage is a loan, not free money.
How Does a Reverse Mortgage Work?
With a HECM reverse mortgage, the home serves as collateral for the loan.
Depending on the particular loan and payment option, proceeds may be available in different ways, potentially including scheduled payments, a line of credit, a lump sum or certain combinations of payment methods.
The amount available to a borrower depends on several factors. For HECMs, these include the age of the youngest borrower or eligible non-borrowing spouse, applicable interest rates and the home's value subject to HUD program limits.
As proceeds are received and interest and applicable charges accrue, the loan balance generally increases.
Who Can Qualify for a Reverse Mortgage?
For a HECM, borrowers generally must be at least 62 years old.
Age isn't the only requirement.
Among other requirements, the property must generally be your principal residence, and you must own the home outright or have enough equity for existing mortgage debt to be paid off when the reverse mortgage closes.
The lender will also conduct a financial assessment to determine whether the borrower has the ability to meet continuing obligations associated with the home, including property taxes and homeowners insurance. HECM borrowers must also participate in counseling with a HUD-approved HECM counselor.
Can I Get a Reverse Mortgage If I Still Have a Mortgage?
Potentially, yes.
You don't necessarily need to own your home free and clear to qualify.
However, an existing mortgage generally must be paid off as part of the reverse mortgage transaction. Depending on the circumstances, proceeds from the reverse mortgage may be used toward paying off the existing mortgage balance.
The amount of equity in the property therefore becomes an important part of determining whether the transaction may work.
How Much Money Can You Receive From a Reverse Mortgage?
There isn't one percentage of home equity that applies to every borrower.
The amount available through a HECM is determined using several factors, including the age of the youngest borrower or eligible non-borrowing spouse, interest rates and the applicable value used for the home.
Generally, older borrowers, lower interest rates and higher home values can result in a higher principal limit, subject to applicable HECM requirements.
That's why two homeowners with similarly valued homes may not necessarily have the same amount available through a reverse mortgage.
How Can You Receive Reverse Mortgage Proceeds?
Depending on the type of reverse mortgage and payment plan selected, borrowers may have different options for receiving loan proceeds.
Rather than thinking of a reverse mortgage simply as receiving one large check, it is helpful to discuss how and when you expect to use the money.
The available payment structure can be an important part of evaluating whether a reverse mortgage fits your financial objectives.
Do You Still Own Your Home With a Reverse Mortgage?
Yes.
This is one of the most common misconceptions about reverse mortgages.
Taking out a reverse mortgage does not mean the lender takes ownership of your home. The title remains in the homeowner's name. Like a traditional mortgage, the home serves as security for the loan.
However, retaining ownership also means retaining important responsibilities.
What Expenses Are You Still Responsible For?
Eliminating required monthly mortgage payments does not eliminate the ongoing costs of owning the home.
HECM borrowers are still responsible for meeting the requirements of the loan, including:
- Paying property taxes
- Maintaining required homeowners insurance
- Paying applicable property charges
- Keeping the home in good repair
- Maintaining the property as a principal residence
Failure to meet these obligations can cause the reverse mortgage to become due and payable and could ultimately result in foreclosure.
This is one of the most important considerations when evaluating a reverse mortgage.
Can You Rent Out Your Home With a Reverse Mortgage?
This requires careful consideration because a HECM generally requires the property to remain the borrower's principal residence.
Having other people living in the home does not, by itself, violate that requirement as long as the borrower continues to occupy the property as required.
However, moving out of the property and converting it into a rental could cause it to no longer qualify as your principal residence, potentially causing the loan to become due and payable.
If you're considering renting the home or being away from it for an extended period, speak with your loan servicer or mortgage professional before making the change.
Can You Use a Reverse Mortgage for Home Improvements?
Reverse mortgage proceeds can potentially be used for home improvements.
However, homeowners should evaluate the overall financial implications rather than looking at a reverse mortgage simply as a source of renovation money.
Because reverse-mortgage proceeds, interest and applicable charges affect the loan balance and remaining home equity, it's important to compare the potential benefits with other financing alternatives.
Homeowners should also be cautious about contractors or others who pressure them to obtain a reverse mortgage specifically to pay for home repairs. The CFPB warns consumers about this type of reverse-mortgage-related sales activity.
When Does a Reverse Mortgage Have to Be Repaid?
A HECM generally becomes due and payable when the last surviving borrower or eligible non-borrowing spouse dies, sells the home or no longer occupies it as a principal residence.
The loan can also become due under other circumstances, including failure to pay required property taxes or homeowners insurance or failure to maintain the property as required.
When the loan becomes due, it generally must be satisfied through the sale of the property, repayment from other funds or another permitted repayment method.
What Happens to a Reverse Mortgage When the Homeowner Dies?
This is an important conversation for homeowners and their families to have before obtaining a reverse mortgage.
Generally, after the last borrower dies, the reverse mortgage becomes due and payable, although special protections may apply to an eligible non-borrowing spouse.
Heirs may have options.
For example, they may sell the property and use the proceeds to satisfy the reverse mortgage. If they want to keep the home, they may be able to repay the required amount using other funds or financing.
For a HECM, if the loan balance exceeds the home's value, specific FHA rules govern the amount heirs may need to repay to retain or sell the property.
Can You Refinance a Reverse Mortgage?
In some circumstances, an existing reverse mortgage may be refinanced into another reverse mortgage.
Whether refinancing makes sense depends on the homeowner's circumstances, current loan, available equity, costs of the new loan and potential benefit of refinancing.
Just because refinancing is possible doesn't mean it is automatically beneficial. The costs and potential advantages should be carefully compared before proceeding.
Can a Reverse Mortgage Be Used to Buy Another Home?
Yes. A HECM for Purchase may allow an eligible borrower age 62 or older to purchase a new principal residence using HECM financing.
The buyer must have sufficient funds to cover the difference between the HECM proceeds and the purchase price, along with applicable transaction costs. The new property must meet HECM requirements and become the borrower's principal residence.
This can be worth exploring for older homeowners considering downsizing or relocating.
What Are the Costs of a Reverse Mortgage?
Reverse mortgages have costs just as traditional mortgages do.
Depending on the loan, costs may include items such as origination charges, appraisal expenses, closing costs, interest and, for a HECM, FHA mortgage insurance premiums.
Some costs may be financed into the loan rather than paid directly out of pocket, but financing costs increases the loan balance and reduces the remaining equity in the home.
Rather than focusing only on whether cash is required at closing, borrowers should consider the total cost of the loan over time.
Advantages and Potential Drawbacks of a Reverse Mortgage
A reverse mortgage can provide significant flexibility for some homeowners, but there are tradeoffs.
Potential advantages can include accessing home equity without required monthly mortgage payments, remaining in the home while loan requirements continue to be satisfied and choosing among available methods of receiving proceeds.
Potential considerations include the accumulation of interest and fees, a growing loan balance, reduced home equity over time, ongoing responsibility for taxes, insurance and maintenance, and the potential effect on the amount of equity ultimately remaining for heirs.
A reverse mortgage should therefore be evaluated as part of a homeowner's broader financial and housing plans.
Questions to Ask Before Choosing a Reverse Mortgage
Before moving forward, consider questions such as:
- How long do I expect to remain in this home?
- How much equity do I currently have?
- What will I use the reverse mortgage proceeds for?
- Can I comfortably continue paying taxes, insurance and other property expenses?
- How will the loan affect my remaining home equity?
- What are the upfront and ongoing costs?
- Are there other financing alternatives I should compare?
- What do I want to happen to the home after I die?
- Does my spouse or another family member live in the home?
- Have I discussed the potential impact with my family and financial advisors?
These conversations can help determine whether a reverse mortgage fits your circumstances rather than simply whether you qualify for one.
Frequently Asked Questions About Reverse Mortgages
What is a reverse mortgage?
A reverse mortgage is a loan secured by a home that allows eligible homeowners to access a portion of their home equity. The most common type is the FHA-insured Home Equity Conversion Mortgage, or HECM.
How old do you have to be to get a reverse mortgage?
For a HECM, borrowers generally must be at least 62 years old. Other eligibility and property requirements also apply.
Do you make monthly mortgage payments on a reverse mortgage?
HECM borrowers generally are not required to make monthly mortgage payments. However, borrowers remain responsible for property taxes, homeowners insurance, applicable property charges, home maintenance and other loan requirements.
Does the bank own your home with a reverse mortgage?
No. The homeowner retains title to the property. The home serves as collateral for the reverse mortgage.
Can you lose your home with a reverse mortgage?
Yes. A reverse mortgage has ongoing requirements. Failure to pay required property taxes or homeowners insurance, maintain the home or meet principal-residence requirements can cause the loan to become due and payable and potentially lead to foreclosure.
What happens to a reverse mortgage when you die?
Generally, the loan becomes due after the last borrower dies, although protections may apply to an eligible non-borrowing spouse. Heirs may have options to sell the home or repay the required amount if they want to keep it.
Can you use a reverse mortgage for home improvements?
Reverse mortgage proceeds may potentially be used for home improvements, but homeowners should consider the cost of borrowing and compare other financing options before deciding.
Can you rent your home if you have a reverse mortgage?
A HECM requires the property to remain the borrower's principal residence. Other people may live in the home, but moving out and converting the property to a rental could cause the loan to become due and payable.
Is a Reverse Mortgage Right for You?
A reverse mortgage can be a useful financial tool for some homeowners, but deciding whether one is appropriate requires more than simply determining whether you meet the age and equity requirements.
How long you expect to remain in the home, your ongoing housing expenses, available equity, financial goals and plans for the property should all be considered.
If you're considering a reverse mortgage in Maryland, Virginia, Washington, D.C., Delaware, North Carolina or Florida, Redwood Mortgage Services can help you review how the financing works and discuss whether it may fit your situation.
Schedule a consultation with Stuart Kiehne to discuss your reverse mortgage options.
All loans subject to approval. Equal Housing Lender.