A reverse mortgage allows homeowners 62 and older to borrow money using their home as collateral, much like a conventional mortgage. Instead of increasing your equity over time with every payment, you increase the amount you owe instead. However, you don’t have to repay the loan until you sell the home.
“With the huge run-up in the value of real estate, many people will find themselves equity-rich but cashflow-poor, as they retire and rely on Social Security and pensions for income,” says Melissa Cohn, regional vice president at William Raveis Mortgage. “With a reverse mortgage, these people have the opportunity to stay in their homes.”
How does a reverse mortgage work?
When you take out a reverse mortgage, you keep the title to the home and receive your funds, often in a lump sum or monthly installments. The mortgage lender adds interest over time, so your balance goes up instead of down. However, you can’t owe more than the house is worth when you repay the loan.
To pay off the reverse mortgage, you typically sell the home and use the proceeds to satisfy the loan instead of making monthly payments.
Keep in mind:
You have to keep up with the maintenance and repair of the home while you have a reverse mortgage. Otherwise, the lender may determine that you have not upheld your end of the agreement, and call for repayment in full.
What are the types of reverse mortgages?
There are several types of reverse mortgages, typically divided into two categories: government-backed or privately issued.
Federally insured reverse mortgages
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration (FHA). As with FHA loans, these mortgages are only available through approved mortgage lenders.
Single-purpose reverse mortgages
This type of reverse mortgage provides funding for a particular use, such as home repairs or paying property taxes, and they are not federally insured. They’re usually offered to low- or moderate-income homeowners by state agencies, nonprofits or local governments.
Proprietary reverse mortgages
Also called private reverse mortgages, these are mortgage products offered by individual lenders and are not backed by federal, state or local authorities. As such, proprietary reverse mortgages aren’t restricted by county lending limits, so they’re often favored by borrowers with higher home values.
Who is eligible for a reverse mortgage?
Eligibility can vary according to the mortgage type and lender, but below are some common requirements for a reverse mortgage:
- Must be age 62 or older
- The home must be your principal residence
- At least one owner must reside in the home
- You should own it outright (or have a low balance remaining on your mortgage)
- The home must meet the mortgage lender’s minimum property standards
- Usually, the home must be between one and four units, single-family or owner-occupied
- You may be required to complete an approved mortgage counseling program
What are the costs and fees associated with a reverse mortgage?
You should be aware that a reverse mortgage tends to be an expensive way to borrow money. Also, because it’s a new loan, you’ll likely need to pay origination costs.
Although the costs associated with a reverse mortgage will vary by lender, loan program and loan amount, here are the basics of what to expect:
- Interest: As a reverse mortgage is a loan, you’ll pay interest on what you borrow. The mortgage interest rate may be fixed or adjustable depending on the loan.
- Origination fees: These are fees the lender charges to create and administer the loan. They’re typically $6,000 or less, according to the Consumer Financial Protection Bureau.
- Closing costs: These are costs associated with closing the loan, such as title search, recording fees, appraisals or inspections.
- Mortgage insurance: You may be required to pay a mortgage insurance premium each year, typically 0.50% of the mortgage balance.
- Regular service fees: Some lenders charge monthly account or servicing fees to cover their costs in mailing you statements and servicing your mortgage.
- Home insurance: This may be an annual payment to your homeowners insurance company to keep your insurance policy in force.
- Property taxes: You’ll need to keep up with your property taxes, too; with a reverse mortgage, the property remains in your name and you are still responsible for taxes.
Pros and cons of a reverse mortgage
Although a reverse mortgage has many advantages, it’s not for everyone. Here are some of the most important factors to consider:
Pros
- Supplement your income: When you’re at or near retirement, your income can change drastically. You can use a reverse mortgage to supplement your income and help you pay everyday expenses.
- Remain in your home: Instead of selling your home to access funds, a reverse mortgage lets you remain in the home while receiving payments.
- Proceeds are income tax-free: Reverse mortgage payments are not taxable income, according to the IRS. They are considered loan proceeds that must be repaid.
- You can’t exceed what your home is worth: Legally, you can’t owe the lender more than your home is worth when you repay the loan if the loan has a “non-recourse” clause.
Cons
- It can be an expensive borrowing method: You’ll still need to pay ongoing fees, taxes, insurance and maintenance costs, even as you’re receiving reverse mortgage payments. The larger the loan, the more you’ll pay.
- You may get nothing when you sell the home: You’ll typically need to sell the home or turn it over to the lender to satisfy the loan, which may leave you with little or no home equity and nothing for your heirs to inherit.
- You risk default if you don’t keep up with taxes and repairs: You could also lose your home if you let your insurance lapse or stop using it as your primary residence.
What is a reverse mortgage FAQ
Can I lose my home with a reverse mortgage?
Yes, it’s possible to lose your home with a reverse mortgage. The lender can foreclose on your home if you don’t properly maintain it or miss payments for homeowners insurance, flood insurance, property taxes or other property charges that are part of your loan agreement. It’s important to read your loan documents carefully and contact your lender if you’re struggling to make these payments.
How much can I borrow with a reverse mortgage?
The maximum amount you can borrow using a reverse mortgage is the “principal limit,” and it varies depending on how old you are, how much your home is worth and the interest rate on the loan. For HECMs, the most common type of reverse mortgage, the maximum you can borrow is $1,149,825 in 2024, according to the U.S. Department of Housing and Urban Development (HUD).
What happens if I outlive my reverse mortgage?
It’s possible that you could live long enough to see the loan proceeds run out, but you can’t outlive a reverse mortgage because the loan repayment isn’t due until you move, sell, or pass away. Therefore, you can continue living in the home as long as you can ensure that property taxes, fees and insurance continue to be paid.
How does a reverse mortgage affect my heirs?
After your death, your heirs will need to pay the balance of the reverse mortgage if they wish to keep the home. Otherwise, they’ll have to sell the home and use the proceeds to pay the balance. If they want to sell but the remaining balance is more than the home’s appraised value, they’ll have to repay 95% of the home’s value; if you paid for mortgage insurance, it covers the remaining balance. For HECMs, your heirs have 30 days after your death to buy, sell or turn the home over to the lender. They may be able to file an extension to gain enough time to get a mortgage to buy the house themselves.
If your heir is a co-borrower, they may be able to remain in the home and receive payments. If your heir is a non-borrowing spouse, they may be able to stay in the home if they pay the loan balance; in some cases, they might be able to qualify through HUD as an eligible non-borrowing spouse, which allows them to stay in the home without repayment.
Is a reverse mortgage the same as a home equity loan?
A reverse mortgage is different from a home equity loan, even though both loan products use your home as collateral. With a home equity loan, you borrow against your home’s equity, but you keep the home and pay off the mortgage. With a reverse mortgage, you don’t pay off the loan over time but rather receive payment and pay off the loan when you move, sell or pass away.