Reverse mortgages are a popular way for seniors to utilize their homes as untapped sources of cash. Many older people find that they’re a good way to bring in a steady source of funds, especially if they are no longer able to rely on a stable income and don’t have enough to pay for daily living expenses or long-term healthcare.
However, a reverse mortgage is borrowed money, so as with any loan, it’s not the right option for everyone. It’s important to understand exactly what a reverse mortgage is, how it works, and the pros and cons of getting one. Our guide explains what you need to know if you’re a senior homeowner interested in obtaining a reverse mortgage.
This guide discusses home equity conversion mortgages, or HECMs. An HECM is used for homes valued $679,650 or less, and it’s the most common type of reverse mortgage in the United States. If your home has a higher value than this maximum, see our section on Other Types of Reverse Mortgages at the end of the guide.
What Is a Reverse Mortgage?
A reverse mortgage is a loan based on the equity in a senior’s home. Senior citizens are able to borrow against the equity they’ve built into their homes or its appraised value. They can take out their funds as a line of credit, in a lump sum, in monthly payments, or in a combination of these. The loan isn’t paid back in monthly installments the way a standard mortgage is. Instead, the lender pays the homeowner monthly, all at once, or as needed via a credit line — hence, the term “reverse mortgage.” The payment is due in full when the homeowner passes away, sells the home, or no longer uses the home as their primary residence.
In order to qualify for a reverse mortgage, you must:
- Be at least 62 years old
- Own your home outright (in other words, there is no longer a mortgage on it) or have built at least 50 percent equity into it
- Own a qualified home type
There are a few other important things to know about HECM reverse mortgages, which are discussed in more detail throughout this guide:
- The amount of the reverse mortgage can’t exceed the appraised value of the home. As long as the home sells for its market value, this makes it possible for the homeowners or their estate to pay the loan back in full by selling the home, without needing to use any out-of-pocket funds. The absolute maximum you can borrow with an HECM reverse mortgage is $679,650.
- Older applicants are able to borrow higher loan amounts than younger ones.
- Your home is the collateral for the loan. While federal regulations make it very difficult for lenders to seize the home should there be problems with repayment, it does happen in rare cases.
Pros of Reverse Mortgages
Reverse mortgages are popular among senior homeowners for good reason, including these noteworthy pros:
- Most single-family homes, manufactured homes built after June of 1976, townhomes, and condominiums are eligible.
- Borrowers never owe more than the value of their home, even if their property’s value declines from the time they obtained a reverse mortgage and when they pay off the loan balance.
- They’re an easy way to cash in on your assets, especially if your home is your primary or your only asset.
- You don’t need an income and you don’t need to have good credit to qualify, unlike with home equity loans and home equity lines of credit (HELOCs).
- The funds can be used for any purpose.
- The borrowed funds are tax-free.
- No money for the loan itself is paid up front. If you opt for a lump sum, the interest is added to the loan balance and paid at the time repayment is due rather than when the money is borrowed. If you take your funds via installments or as a line of credit, you’ll pay an adjustable interest rate during the term of the loan.
- Other than interest, you don’t owe any payments as long as you own the house and it’s your primary residence.
- If both spouses are listed as borrowers on the loan, it will still be in effect if one passes away, so the survivor can continue living in the home.
Cons of Reverse Mortgages
Although their list of pros make them an appealing option for many senior citizens, reverse mortgages do come with drawbacks, and they’re not right for everyone. It’s important to be aware of the cons of these loans:
- There are many reverse mortgage scams. Only work with an institution that is Federal Housing Administration (FHA)-approved and accredited by the Better Business Bureau (BBB) when obtaining a reverse mortgage, and do not let a third party obtain one on your behalf. Use the FHA-Approved Reverse Mortgage Lenders online search tool to find a reputable institution near you.
- They’re only available from specialty lenders. (In other words, you can’t apply for one at your neighborhood bank.)
- Most cooperative housing (co-op) units aren’t eligible due to guidelines set by the FHA.
- Borrowers often pay high insurance premiums in order to protect themselves from defaulting on the loan. Because the government protects debtors from having to surrender their homes as much as possible, high insurance premiums protect lenders from losing money if the size of the loan outgrows the home’s value (usually due to a declining housing market).
- Borrowers must pay a loan origination fee, mortgage insurance premiums, and closing costs in order to obtain one. Closing costs can be a significant expense, since they often include appraisal, title search, and other fees.
- Reverse mortgage applicants are required to take a counseling session that’s been approved by the Department of Housing and Urban Development (HUD), which charge an average of about $125 and take at least an hour and a half to complete.
- Taking out a reverse mortgage may affect the borrower’s Medicaid and Supplemental Security Income (SSI) eligibility.
- If the home sells for less than the appraised value at the time the reverse mortgage was given, the difference will need to be paid by the borrower or their estate out of pocket.
- Although both spouses must be named on a reverse mortgage, if only one spouse is listed as the borrower, the other must repay the loan should the borrowing spouse pass away or move out of the home for a year or longer (if he or she moves into a nursing home, for example). If they can’t pay the loan, they’ll have to sell the house, even if they still live there.
- It’s possible to “outlive” a reverse mortgage. For example, if the debtor takes a lump sum payment and spends all of it, they can’t borrow more money as part of the loan.
- A debtor breaks the terms of the loan and will need to repay it immediately if they:
- Don’t pay their property taxes
- Don’t pay their homeowners insurance
- Don’t pay applicable homeowners association fees
- Don’t maintain and repair the home as needed
- Live in another primary residence for over one year
Other Types of Reverse Mortgages
Homes with values higher than $679,650 are eligible for proprietary reverse mortgages (also called jumbo reverse mortgages). There are also single-purpose reverse mortgages available in some areas that are given through nonprofits and local governments, but they’re only available in certain states. (Even when they’re from nonprofits, they still have to be paid back.) As with HECMs, both of these types of reverse mortgages have requirements you’ll need to meet in order to obtain one and protect your financial future. If your home is worth more than $679,650 or you’d like to learn about reverse mortgages available through your local nonprofit and government sectors, speak with your banking specialist. (Again, you most likely won’t be able to apply for a reverse mortgage through your primary bank, but your personal banker will be able to direct you to an accredited institution.)
Taking out a reverse mortgage is a great option for many seniors. Those who own their property free and clear or have at least 50 percent equity in it, live in an area with a steady housing market, and need funds to pay for daily living expenses, ongoing healthcare, or home repair or modification costs can greatly benefit from this type of loan. Be sure to speak with your financial advisor and do your own research if you’re considering getting a reverse mortgage, and only work with an FHA-approved lender if you decide this is the right move for you.