A reverse mortgage is a loan in which a homeowner who is 62 or older receives cash — usually in the form of fixed monthly payments — against the value of his or her home’s equity. This is typically done to supplement retirement income while allowing the homeowner to continue living in the home.
With a reverse mortgage, the proceeds do not need to be repaid until the home is sold or the borrowers move out or die. Often, the loan is repaid by selling the home and using the proceeds to repay the loan. When the homeowner dies, the loan is typically repaid by the heirs. The balance of the loan technically becomes due upon death, but the borrower’s heirs typically have around six months to repay it.
FHA-backed reverse mortgages: $679,650
Loan is repaid when the borrower dies, moves or sells house.
Varies; can be a fixed rate or a variable rate.
There are three main kinds of reverse mortgages. Each comes with its own advantages and disadvantages. Compare reverse mortgage lenders and loans to make sure you pick the one that is right for you.
Single-purpose reverse mortgages are typically the cheapest option. These are reverse mortgages offered by state or local governments, or nonprofit organizations. The proceeds from this kind of reverse mortgage can be used only for purposes specified by the lender, such as paying property taxes or making repairs. These kinds of reverse mortgages are typically offered only to low- or moderate-income borrowers.
The Federal Housing Administration (FHA) — part of the U.S. Department of Housing and Urban Development (HUD) — guarantees a reverse mortgage program called HECM — Home Equity Conversion Mortgage. This is the most common type of reverse mortgage. The maximum claim amount with a HECM is $679,650.
Proprietary reverse mortgages are offered by private companies that are not beholden to the requirements of HECMs. Proprietary reverse mortgages can exceed the HECM limits.
To be approved for a reverse mortgage, you must meet the following qualifications:
Before deciding to take out a reverse mortgage or if you don’t qualify for one, consider alternative methods of tapping into your home’s equity.
A second mortgage can be a home equity line of credit (HELOC) or a home equity loan. Both are secured by the home’s equity, and allow the homeowners to take out a loan in addition to their outstanding home mortgage. Home equity loans are installment loans, allowing the borrower to take out an upfront lump sum. HELOCs are a form of revolving credit, meaning you can borrow as little or as much as you want up to a certain limit.
If you are able to refinance your mortgage, you may be able to take advantage of a cash-out refinance, which allows homeowners to refinance their mortgage for more than the amount of the principal loan and receive the difference in cash.
You could sell your home to your children, or even arrange a private reverse mortgage with your children, in which they would loan you money against the equity in your home. They would be repaid after selling the home upon your death. Some financial institutions specialize in setting up such family loans, and while they don’t do it for free, it could prove a cheaper option than a traditional reverse mortgage.
How much money can you get from a reverse mortgage? It depends. A number of factors can determine the amount you can get.
To qualify for a reverse mortgage, the youngest borrower must be at least age 62. The estimated length of the loan plays a role in determining how much you can borrow, so older homeowners may be able to borrow more money than younger homeowners.
The amount of equity in your home will help determine how much money you can receive from a reverse mortgage. The more equity in your home, the more money you typically will be able to borrow. Lenders will determine your home’s equity by having the home appraised.
The federal government limits how much money you can borrow from their reverse mortgage programs. If you plan to get a HECM backed by the FHA, the most you’ll be able to take out is $679,650. If you want to borrow money beyond those limits, you’ll need to look into a proprietary reverse mortgage.
The lower the interest rate on your reverse mortgage, the more money you will typically be able to borrow.
Reverse mortgages are typically more expensive than traditional mortgages.
If you take out a HECM, you will be required to purchase FHA mortgage insurance. You will owe an upfront premium that costs 2 percent of the appraised value of the home, and an annual fee paid monthly of 0.5 percent of the mortgage balance. These costs can be financed into the loan.
These can include such costs as an appraisal, inspections, credit checks, etc.
If you take out a HECM, lenders will charge you a monthly servicing fee to pay for services such as disbursing loan proceeds and sending account statements. If the interest rate is fixed or adjusts annually, lenders may charge no more than $30 a month; if the rate adjusts monthly, they may charge up to $35 a month.
Origination fees for reverse mortgages typically amount to around 2 percent of the loan. For a HECM, lenders are allowed to charge the larger of $2,500 or 2 percent of the first $200,000 of your home’s value, plus an additional 1 percent for the amount over $200,000.
If you’re considering taking out a reverse mortgage, you may be asking yourself if a reverse mortgage is safe and, if so, whether a reverse mortgage is a good deal.
The answer is, it depends. Reverse mortgages aren’t for everyone, but depending on your needs, reverse mortgages could be a useful tool for supplementing retirement income while remaining in your home.
One protection for reverse mortgage borrowers is mortgage insurance. Although insurance for a “forward” mortgage is designed to protect the lender, mortgage insurance covering a reverse mortgage protects the borrower. FHA-insured HECMs are nonrecourse loans; this means if you or your heirs sell the home to pay back the reverse mortgage, you won’t be required to pay more than the amount the home sold for. As long as the home sells for at least 95 percent of its appraised value, the insurance will cover any difference.
But before you take out a reverse mortgage, consider the costs, which can include mortgage insurance, closing costs, and servicing and origination fees. In addition, consider the pros and cons.
Can you pay off a reverse mortgage early? That’s a trick question — unlike traditional, “forward” mortgages, reverse mortgages don’t have a specific due date; they become due when the borrower either sells their home, moves out or dies. Therefore, borrowers with a reverse mortgage can sell their home at any time. Once the home is sold, however, the balance of the reverse mortgage loan will become due. Borrowers typically will use the proceeds of the sale to pay back the loan; the borrower keeps any money left over, less the costs associated with selling the home and any other liens on the property.