With a reverse mortgage, your loan balance goes up as you receive payments, while a regular mortgage balance goes down as you pay it off. Reverse mortgage lenders add interest to your balance on a monthly basis. There are also closing costs, which can make borrowing a reverse mortgage more expensive. Repayment of a reverse mortgage is delayed as long as you live in the home and meet the loan’s terms. If you die, move out, or sell the home, the reverse mortgage will come due and need to be repaid in full. For many individuals and families approaching retirement, their most significant asset is equity in their homes. A reverse mortgage is for homeowners who built home equity but don’t have retirement funds; the reverse mortgage allows a retiree to live in the house and receive payments based on that home equity. The cash from a reverse mortgage is usually received as a monthly payment for a period of time, such as 10 years.
Alternate name: home equity conversion mortgage (HECM) when government-insured through HUD
Example of a Reverse Mortgage
As an example, imagine your home is currently worth $400,000. At 63 years old, you finish paying off your mortgage, but your savings and retirement income don’t quite meet your needs. You could apply for a reverse mortgage worth $120,000 where the lender gives you $1,000 a month for 10 years. If at age 70 you sell the home and move, the loan would need to be repaid in full (along with fees and interest). You could use the proceeds from the home sale to pay it back.
Types of Reverse Mortgages
A home equity conversion mortgage (HECM) is the most common type of reverse mortgage and the least costly. To get a HECM, you first meet with a HECM counselor, who presents you with reverse mortgage options, repayment, and alternatives, given your complete financial picture. Other reverse mortgages may exist but aren’t common. State and local programs may offer reverse mortgages for tax credits or tax deferral, or home repair and improvement. Proprietary reverse mortgages are private reverse mortgage loans but are extremely rare, as the HECM program is more appealing to consumers and lenders alike.
Pros and Cons of a Reverse Mortgage
There are benefits of a reverse mortgage, but be careful of the drawbacks.
Pros Explained
Cash flow: Home equity you’ve built up over the years can give you the money to help you stay independent and less cash-strapped during retirement. Stay in home: You can pay off your current mortgage and stay in your home without worrying about monthly mortgage payments. Non-taxable income: Income from a reverse mortgage usually isn’t taxable, although you should speak with a tax professional to confirm this.
Cons Explained
Could lose your home: You’re still responsible for home maintenance, property taxes, and insurance payments. As with any mortgage, you’re still required to pay property taxes and maintain the home. For example, a tax lien sale could occur in which the home is auctioned off to pay the outstanding tax bill. Also, you’re still responsible for the monthly payments like any loan, and if you go into default, the servicer could put the property in foreclosure. Heirs may inherit less: You’re turning back the clock on accrued equity. The home must be sold to pay off those amounts owed, although any remaining proceeds can become part of the estate. Income can impact benefits: Money you receive from a reverse mortgage and do not spend the same month could influence any needs-based benefits amount you qualify for, such as Medicaid. Balance may be higher than expected when the loan comes due: Reverse mortgages come with higher interest rates, so while you’re receiving payments every month, your lender is adding interest to the original balance. When your reverse mortgage comes due, you may owe more than you had originally expected.
How To Apply for a Reverse Mortgage
You can apply for a reverse mortgage with an FHA-approved lender or another lender. The lender reviews your borrower and property qualifications for the loan. If married, at least one spouse must be 62 years old or older. A certified appraiser compares your home to recent nearby sales. The loan is then processed for required paperwork and underwriting to verify your income, assets, credit history, and month-to-month living expenses and ensure you’ve made all required tax and insurance payments. The amount of equity you can withdraw is based on:
Your age (older people qualify for more)Interest rate (lower interest rates lead to higher amounts)Lesser of the appraised value, sales price, or limit of $1,089,300 for 2023
You’ll be able to choose between varying payment plans for your amount and interest rates—a fixed interest rate or a monthly or annually adjusting interest rate. Available terms might include a single payment in one lump sum, monthly payments for a specific time period, or as long as you live in the home. You might also receive a line of credit such as a HELOC. After signing the closing paperwork, you receive the reverse mortgage funds. If you still have a mortgage, you will need to first pay it off with the funds. You will continue to receive payments for as long as the reverse mortgage agreement allows. The loan is repaid at the term’s end, which may be defined as when you sell the home, pass away, or the loan term ends. It could also become due if you require long-term care and move to an assisted-living facility, a nursing home, or a convalescent home. Typically in these cases, the home is sold, and the sale proceeds pay back the loan.
