What Is A Reverse Mortgage?

The equity you’ve built in your home is an asset. If you are a senior looking for supplemental retirement income, a reverse mortgage can help you turn that asset into a steady stream of cash.

Turning your home’s equity into an income stream to cover expenses can help you meet retirement costs. But you’ll need to weigh the advantages and disadvantages to decide if this option is right for your situation and financial goals.

How Does A Reverse Mortgage Work?

A reverse mortgage offers homeowners who are 62 or older the chance to borrow against their home’s equity. There are three main types of reverse mortgages, which we’ll dig into later. Since the home equity conversion mortgage (HECM) is the most popular type of reverse mortgage, we’ll mainly focus on that while discussing reverse mortgage guidelines, requirements and costs.

It’s important to remember that reverse mortgages are still a loan type. Essentially, you’re borrowing from the equity you’ve built up in a home. The reverse mortgage will first pay off your existing mortgage, if you have one, then the remaining money is given to you in the form of a lump sum payment, monthly payments, a line of credit or any combination of the three. No monthly payments are required, and the loan balance doesn’t come due until you sell the home, move out of the home or pass away. Keep in mind that you’ll still be responsible for keeping up with the property taxes and homeowners insurance and must maintain the home.

So, how much can you borrow? The lender will order a home appraisal to determine how much the home is worth. From there, the lender can determine how much they are willing to lend you in combination with your financial details. Depending on the situation, you might not be able to tap into the entire amount of equity you’ve built.

You can spend the funds in any way you see fit. Like a cash-out refinance, the lender places no restrictions on how you spend the money. You might decide to pay off other debt, tackle necessary home repairs or simply cover living expenses.

What Are The Requirements For A Reverse Mortgage?

A reverse mortgage isn’t an option for everyone. Reverse mortgage borrowers must be at least 62 years old and meet the property requirements outlined by the U.S. Department of Housing and Urban Development (HUD).

Here’s a closer look at the requirements you’ll need to meet for a successful reverse mortgage application.

Age Requirements

Reverse mortgages were designed to help seniors facing higher costs during retirement. Due to this intention, you’ll need to be at least 62 years old to get a reverse mortgage.

If you are looking to obtain a reverse mortgage but your spouse doesn’t meet the age requirements, then you can proceed by listing them as a non-borrowing spouse. With the non-borrowing spouse designation, they can stay in the home even if you pass away.

However, the non-borrowing spouse may not withdraw any unused loan funds. Additionally, the reverse mortgage loan will come due upon the borrowing spouse’s death. With that, the surviving non-borrowing spouse must either repay the reverse mortgage or face foreclosure.

If your spouse doesn’t meet the age requirements at the moment, it’s possible to add them to your reverse mortgage through a future refinance. But the costs of a refinance might make it more financially efficient to wait until both spouses are at least 62 years old.

Property Requirements

If you meet the age requirements, your property must also pass the test.

First, the home must be owned by the borrower and it must their primary residence.

Additionally, the homeowner must own a substantial amount of equity in your home. Many seeking a reverse mortgage own the home outright. But generally, you’ll need to own at least 50% of the home’s equity.

The property must meet the FHA safety and livability standards. Even if the property is a condo and manufactured home, it must still meet FHA requirements.

Other Requirements

Beyond the requirements above, HUD sets a few other standards to ensure you can afford a reverse mortgage.

You’ll need to meet with a HUD-approved counselor to complete a required counseling session to ensure you understand the loan and any alternative options you may have. In addition to this counseling session, you must go through a financial assessment that proves that you can afford the financial obligations of the loan. These include keeping up with your property taxes, flood insurance and homeowners insurance. If you don’t have enough money to uphold these responsibilities, you may still be able to get the loan, but will need to agree to set aside a portion of your reverse mortgage proceeds to cover these costs.

How Much Does A Reverse Mortgage Cost?

Like other types of mortgages, a reverse mortgage comes with several costs.

You may face higher interest rates and run into a wide range of fees. The fees you might encounter when taking out a HECM through a HUD-approved lender include:

• Mortgage insurance premium (MIP): You’ll face a 2% MIP of the initial loan balance at closing. Plus, an annual MIP of 0.5% of the remaining loan balance.
• Origination fee: The origination fee can be either $2,500 or 2% of the first $200,000 home value plus 1% of the amount over $200,000. However, the lender must cap HECM origination fees at $6,000.
• Servicing fees: Lenders are allowed to charge a monthly maintenance fee to manage your HECM. The fee cannot exceed $30 – $35 per month, depending on your loan.
• Third-party fees: During the closing process, you’ll encounter a range of third-party fees. A few examples include appraisals, title searches, insurance and credit checks. These fees will feel familiar because you paid most of them before – during your initial closing process for your original mortgage.

Although HECMs many allow you to roll many costs into the loan to avoid upfront expenses, you’ll still be paying a variety of fees. Run the numbers to make sure the costs are worth the rewards. In some cases, you’ll decide that paying these fees negates the financial opportunity presented by the reverse mortgage.

Types Of Reverse Mortgages

There are three main types of reverse mortgages to choose from.

Home Equity Conversion Mortgage (HECM)

A HECM is the most common reverse mortgage option. This loan type is made available exclusively through FHA-approved lenders and backed by HUD. There may be more protections in place for borrowers as well, including revere mortgage counseling and a financial assessment to ensure borrowers are successful with the loan.

The downside of a HECM is the typically higher upfront costs and there is a limit to how much you can borrow. As of 2022, HECMs available through FHA-approved lenders have a limit of $970,800.

Single-Purpose Reverse Mortgage

Single-purpose reverse mortgages are made available through nonprofit organizations, state government agencies and local government agencies. The biggest difference is that you can only use the funds for a single reason. And the lender will let you know what reason is approved.

For example, you might only be able to use the payment from your reverse mortgage to cover your property taxes or homeowners insurance. If you’re looking to use a reverse mortgage to cover a variety of living expenses, then a single-purpose option isn’t a good fit.

Proprietary Reverse Mortgage

A proprietary reverse mortgage is one that’s not backed by the government. Instead, private lenders issue these loan types.

Generally, proprietary reverse mortgage lenders can provide more funds for a high-value property. Although you have a chance of getting more funds through this type of mortgage, the lack of backing by the federal government means they don’t have the same borrower protections.

Beyond the lack of government protections, you’ll likely face higher costs with a proprietary reverse mortgage. Before jumping into this option, be sure to compare costs at different lenders to find the best rate.

Is A Reverse Mortgage A Good Idea?

As a senior, it’s easy to see how the proceeds from a reverse mortgage will come in handy.

After all, the high costs of retirement make it challenging to make ends meet on a fixed income. You can use the proceeds to cover home improvements, debt payments, medical and living expenses or to build an emergency fund. Depending on your situation, you might opt for a lump sum or regular monthly payments to cover your financial needs or get a line of credit to use whenever you need.

The reality is that a reverse mortgage can help you afford a more comfortable retirement. And if you’ve built up substantial home equity over your working years, it’s tempting to tap into the fruits of your labor.

But as with all loans, there are some complications to a reverse mortgage. It’s a complex loan product that can be especially confusing if the primary borrower passes away and has a nonborrowing spouse or wishes to leave the home to heirs.

Before moving forward, consider discussing the option with your family or financial advisor. Look for alternatives before taking out this type of loan as a solution to your retirement cash flow needs.

Reverse Mortgage Vs. Mortgage Refinance

A reverse mortgage offers senior citizens an opportunity to turn their hard-earned home equity into an income stream. The extra income can make for a more comfortable retirement while living in your home.

However, there are some limitations to a reverse mortgage. For example, if you plan on leaving your home soon, then a reverse mortgage isn’t a good choice because you must live in the home as a primary residence. Another reason to skip a reverse mortgage is if you intend to leave the home to your heirs. A reverse mortgage can make that transition complicated and expensive for your beneficiaries.

A mortgage refinance is another option to consider, and there are several different refinancing options to choose from. Whether you pursue a cash-out refinance loan to tap into your home’s equity or refinance to a longer term with lower monthly payments, you can choose a solution that suits your needs.

Ultimately, a mortgage refinance can be a more flexible opportunity. But the downside is that you’ll still need to make monthly payments to repay the mortgage refinance, unlike a reverse mortgage which requires no monthly payment.

Pros And Cons Of A Reverse Mortgage

A reverse mortgage is a financial product that requires you to weigh out the advantages and disadvantages.

Pros

• Access your home’s equity: You can tap into your home’s equity that can allow you to keep up with living expenses.
• Stay in your home: A major advantage is that you can continue to live in the home and you remain on the title.
• Non-borrowing spouse protections: In some cases, the non-borrowing spouse can remain in the home after the borrower dies.
• Protection from declining home values: HECMs are nonrecourse loans, which means that homeowners are shielded from declining home values. If the home sells for less than what is owed on the loan, government insurance covers the difference.

Cons

• Fees: You must pay fees to access a reverse mortgage.
• Loan balance can increase: While monthly payments aren’t required, if you don’t make interest payments, the loan balance can grow over time.
• Complications for heirs: If you want your heirs to inherit the property, the loan must be repaid in full or refinanced into a regular mortgage.
• Homeownership costs: Although you won’t have to make a monthly mortgage payment, you’ll still need to pay property taxes and homeowners insurance and maintain the home.

How To Avoid Reverse Mortgage Scams

If you are considering a reverse mortgage, it’s critical to avoid a scam. Unfortunately, seniors are often targeted for financial scams. So, the reverse mortgage market is filled with them.

The first step to avoiding a scam is to work with a reputable company and read all of the terms of a potential reverse mortgage. If you don’t understand a particular section, then don’t be afraid to ask questions. A legitimate reverse mortgage provider will be happy to answer your questions.

One common scam is to ask homeowners to ‘invest’ the proceeds of a reverse mortgage. Other unfortunate scams may involve veteran loans and contractor loans. In each of these cases, scammers provide misleading information with an offer that’s too good to be true. If you run into an offer that seems too good to be true, that’s because it usually is a scam. Also know that the U.S. Department of Veterans Affairs (VA) doesn’t offer reverse mortgages. If you are offered this ‘opportunity,’ steer clear.

If you think you’re being scammed, report it to the Federal Trade Commission by filing a complaint. Other places to report suspected fraud include your state Attorney General’s office or your state’s banking regulatory agency. When you file a complaint, your information can help protect other seniors from potentially falling for the same scam.

Reverse Mortgage FAQs

Can you lose your house with a reverse mortgage?

When you take out a mortgage of any kind, there is a possibility of losing the home. But when it comes to a reverse mortgage, the prospects of losing your home come from not keeping up with your financial and homeownership obligations.

You can lose your house with a reverse mortgage if you fail to pay property taxes or homeowners insurance. But if you keep up with those financial responsibilities, llive in the home as a primary residence and continue to maintain the home then you won’t lose your home with a reverse mortgage.

Can you owe more than the home is worth with a reverse mortgage?

Lenders won’t provide borrowers with a reverse mortgage for more than the home is worth. However, it is possible that your home value may decline and you could owe more on the loan than your home is worth. If you have a HECM and that happens, mortgage insurance will cover the difference.

Can you refinance a reverse mortgage?

It’s possible to refinance a reverse mortgage. A few reasons to refinance include adding someone to the loan, obtaining more equity or locking in a lower interest rate.

Do you have to pay back a reverse mortgage?

As with all loans, a reverse mortgage must be repaid eventually. In most cases, you’ll be required to repay the loan when you move out of the home or when you pass away. At that point, the property may be sold to cover the costs of your reverse mortgage. If your heirs wish to keep the home, they must pay 95% of the appraised value or the loan balance – whichever is less. If they wish to sell the home, the proceeds from the sale must first pay off the loan, then they can keep the remaining money.