A reverse mortgage is a unique type of loan that allows homeowners aged 62 and older to convert part of the equity in their home into cash. With a reverse mortgage, you receive money from the lender while still retaining ownership of your home.
Unlike a traditional mortgage, you don’t make monthly payments with a reverse mortgage. Instead, the lender makes payments to you! Read on to learn more about reverse mortgages and whether one might be right for you.
How Does a Reverse Mortgage Work?
With a reverse mortgage, you (the borrower) receive money from the lender in one of several ways:
- A lump sum payment
- Regular monthly payments
- A line of credit you can draw on as needed
- A combination of the above
Meanwhile, you retain ownership of your home and don’t need to make monthly repayments. The loan only comes due when you pass away, sell the home, or permanently move out.
At that point, you or your heirs can repay the loan by selling the home or refinancing the debt. If the sale proceeds don’t cover the full loan balance, neither you nor your heirs will be on the hook for the difference.
As you receive funds through your reverse mortgage, interest and fees are added to your loan balance each month. So while you aren’t making payments, your total debt continues to grow.
Reverse Mortgage Requirements
To qualify for a reverse mortgage you must:
- Be at least 62 years old
- Own your home outright or have substantial equity
- Occupy the home as your primary residence
- Maintain the home and stay current on taxes and insurance
- Complete government-approved counseling
The amount you can borrow depends on your age, home value, interest rates, and the type of reverse mortgage you choose.
Pros and Cons of Reverse Mortgages
Pros | Cons |
| Access tax-free cash from your home equity | Upfront costs and fees |
| Eliminate monthly mortgage payments | Interest causes balance to grow over time |
| Receive steady income to supplement retirement | Less inheritance left for heirs |
| Avoid the need to downsize or relocate | Risk of foreclosure if you default on taxes/insurance |
| Pay off an existing mortgage and reduce debt | Reduced eligibility for some public benefits |
Carefully weigh the pros and cons before deciding if a reverse mortgage is right for you.
Types of Reverse Mortgages
There are three main types of reverse mortgage loans:
Home Equity Conversion Mortgage (HECM)
This FHA-insured loan is the most popular reverse mortgage option. HECM borrowers can receive funds as a lump sum, monthly payments, a line of credit, or a combination.
Proprietary Reverse Mortgage
Offered by private lenders, these loans are not government-backed. They may have higher borrowing limits than HECMs.
Single-Purpose Reverse Mortgage
Only the proceeds from these loans can be used for a specific purpose, like home improvements. Offered by nonprofits and state/local agencies.
What Are the Costs?
Reverse mortgages involve several types of fees:
- Origination fee
- Closing costs
- Mortgage insurance premiums
- Servicing fees
- Interest on loan balance
Government-insured HECM loans have limits on how much lenders can charge for certain fees.
Is a Reverse Mortgage Right for You?
Reverse mortgages allow seniors to access funds from their home equity. But make sure you understand all the risks and costs involved before applying. Consult with a financial advisor or housing counselor to determine if a reverse mortgage aligns with your overall financial plan.
Frequently Asked Questions
How do heirs repay a reverse mortgage?
When the borrower dies or moves out, heirs can either repay the loan balance or sell the home and use the proceeds to pay off the lender.
Can I get foreclosed on with a reverse mortgage?
Yes, if you fall behind on property taxes, insurance, or home maintenance. Make sure you have a plan for covering these costs.
Is a reverse mortgage riskier than a home equity loan?
In some ways yes, because the balance owed grows over time. But reverse mortgages offer unique protections for seniors that other loans don’t.
What happens when the loan balance exceeds my home value?
Neither you nor your heirs will ever owe more than the value of the home when it’s sold. The lender assumes this risk.
Can I get a reverse mortgage if I still have a mortgage balance?
Yes, many borrowers use reverse mortgages to pay off their existing mortgage. You’ll need at least 50% home equity.
