A reverse mortgage loan is a program that allows homeowners 62 years and older to retain homeownership while converting equity into cash. This type of refinance is a great option for seniors who want to age in place and get rid of their monthly housing payment.
With a reverse mortgage, you can let your equity pay off your current mortgage. Borrowers choose to receive their funds upfront, via monthly payments, or let them grow as a line of credit. This strategy ensures greater financial stability and makes your retirement savings last longer.
How does a reverse mortgage work?
A reverse mortgage loan works differently than a traditional home loan. With a traditional mortgage, you make payments to your lender. As you do so and home prices increases, you build equity.
Reverse mortgage loans function based on cash in equity. Your lender provides you with funds from the equity you’ve gained. Borrowers can choose to receive their funds via monthly payments or a lump sum.
While you don’t need to make payments with a reverse mortgage loan, you still have certain financial obligations to uphold with your residence. For one thing, you must stay current on homeowners insurance, property taxes, and HOA fees (if applicable). Those who fail to remain in good standing with these expenses risk losing their home altogether.
It’s imperative to understand that the home serves as the collateral for a reverse mortgage and that proceeds from the home’s eventual sale go to the lender to repay the loan.
Types of reverse mortgages
There are different types of reverse mortgage loans to fit your needs. Take a look at the following options and decide which is best for you.
Home Equity Conversion Mortgage (HECM)
Older homeowners have turned to HECM reverse mortgage loans since 1988. The American Advisors Group states that borrowers can qualify for this loan option on their home’s value up to $822,375. The HECM is backed by the FHA, which means those who qualify can take advantage of more competitive rates and lower fees.
Borrowers can choose a fixed or an adjustable rate for their HECM. Regardless of the type of interest rate you go with, you’ll need to meet with a HUD-approved counselor to discuss your loan in greater detail and review any possible alternatives. Not every homeowner is eligible for the HECM, and lender requirements vary.
Proprietary reverse mortgage
In contrast to the Home Equity Conversion Mortgage, a proprietary reverse mortgage isn’t backed by the government. While you’ll likely have to contend with higher interest rates, you may qualify for extra funds depending on the appraisal. Proprietary reverse mortgages typically make the most sense for borrowers with pricier homes.
One potential drawback of this loan option is the inability to obtain funds through monthly payments. Since you’ll receive the money as a lump sum, you’ll need to create a spending strategy and be disciplined with the funds for years to come. Lastly, there are no insurance premiums with a proprietary reverse mortgage.
Single-purpose reverse mortgage
Homeowners often struggle to find a lender that offers this type of reverse mortgage because it’s only available at select government agencies and nonprofits. You can put the funds toward home repairs, upgrades, and property taxes, though you must decide in advance. You may run into more rules and limitations with a single-purpose reverse mortgage than with the previous two reverse mortgage loans.
This loan type offers flexibility for low-middle income homeowners interested in the most affordable reverse mortgage loan option.
Who benefits from a reverse mortgage?
You may be a good candidate for a reverse mortgage loan if you want to remain in your current home and have the necessary funds for property taxes, homeowners insurance, and maintenance expenses. It’s also common for borrowers to pursue this financing option if they don’t want to sell their residence or have no plan of leaving it to heirs. Whatever your situation, be sure to understand the pros and cons of a reverse mortgage loan.
Stay in your home
Avoid the hassle of selling a house and moving during your golden years. Instead, continue living in the home you love and use your reverse mortgage funds for anything you need. Many homeowners end up using this money for improvements or medical costs.
Get rid of monthly payments
Imagine what you could do without having a regular monthly mortgage payment. While some homeowners might take up new hobbies or go on vacations, others might save these funds for down the road when they need it the most. Whatever you choose, eliminating your biggest expense can feel like a weight off your shoulders.
Hold off on using retirement funds
A reverse mortgage loan can serve as a buffer between you and your retirement funds. Many homeowners would prefer to tap the equity in their home first before a 401(k), pension, or Social Security. Talk to a financial advisor before deciding whether a reverse mortgage is right for you.
Lenders require you to live in the home as your primary residence to be eligible for a reverse mortgage loan. That said, vacation homes and investment properties don’t qualify.
The loan balance increases over time
The longer you have a reverse mortgage, the more the amount due grows. There could be a point when you have no or minimal equity remaining and no inheritance left for your loved ones.
Fees are involved
You’ll need to account for service and interest fees when obtaining a reverse mortgage loan.
How to obtain a reverse mortgage
Must be 62 years or older
Live in the home as your primary residence (investment homes are excluded)
Apply for a reverse mortgage loan and successfully work through every step of the process, including underwriting and closing
Must continue paying homeowners insurance, property taxes, and HOA dues after receiving reverse mortgage funds
What costs are associated with a reverse mortgage?
Eligible homeowners can expect to pay title and government fees, among other costs. While you could spend anywhere from $2,500-$3,000 on a reverse mortgage loan, your lender will give you the option to roll these costs into the loan.
How much can you borrow with a reverse mortgage?
The exact amount depends on several factors, including your financial profile and available equity.
How do I avoid reverse mortgage scams?
Only conduct financial transactions with reputable lenders who have your best interest in mind. Double-check all loan details and ask questions before adding your signature.
Is it possible to lose your home with a reverse mortgage?
Unfortunately, yes. A lender can call the loan due if you fail to maintain the property or pay your homeowners insurance/property taxes.
Are there alternatives to a reverse mortgage?
A cash-out refinance continues to be a popular financing solution for older homeowners. You can access part of your equity as cash and use the money to pay off debt, make home improvements, or put in the bank.
How do you pay back a reverse mortgage?
You can either sell the home, refinance the loan, provide a deed in lieu of foreclosure, or take out a new mortgage altogether.
Do you still own your home with a reverse mortgage?
Yes, you retain your homeownership after taking out a reverse mortgage loan.
Can a family member take over a reverse mortgage?
While you can’t legally add a family member to an existing reverse mortgage loan, they can inherit the property when you die.
Do I need income to obtain a reverse mortgage?
No. Since there are no monthly repayments, homeowners don’t have to worry about income requirements.