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What is a reverse mortgage?
A reverse mortgage is a type of home loan that allows a senior homeowner to borrow money from the bank based on the equity in their home. Reverse mortgage eligibility is limited to homeowners aged 62 or older who use the home as a primary residence and who either own the home outright or have a low mortgage balance.
While a reverse mortgage can offer senior homeowners monthly income, it is not necessarily the right choice for everyone. Here’s what you need to know about reverse mortgages to help you determine if it’s a good fit for you.
Read more: How to get a mortgage in 2024
How does a reverse mortgage work?
Like a traditional mortgage, a reverse mortgage is a home loan that uses your house as collateral. In both cases, your name is on the deed.
However, with a traditional mortgage, you borrow money and pay it back in monthly installments. A reverse mortgage is just what it sounds like: Instead of paying money, you receive money from the lender.
You do not have to repay the loan while you live in the house, but the loan will come due if you sell the house, if you die (meaning your estate or your heirs are responsible for honoring the loan), or if you have to move somewhere else (such as a nursing facility) for more than 12 months.
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Types of reverse mortgages
HECM
There are multiple types of reverse mortgages, although the most common loan is a Home Equity Conversion Mortgage (HECM, pronounced HECK-um).
HECM loans are insured by the Federal Housing Administration (FHA), which protects the lender from borrower default. HECM loans have a maximum claim amount (MCA), which is the limit on HECM lending, no matter the home’s appraised value. For 2024, the HECM MCA is $1,149,825. HECM loans also provide protection to borrowers, as you will never have to pay more than 95% of the home’s appraised value to satisfy the loan — even if you owe more than that.
Reverse mortgages from private lenders
In addition to HECM loans, homeowners may also encounter proprietary reverse mortgage loans from private lenders. These loans are not backed by the FHA and are usually used by homeowners with homes valued above the HECM MCA.
Single-purpose loans
There are also some single-purpose reverse mortgage loans offered by state and local governments or nonprofit organizations. The proceeds for these kinds of loans must be used for one specific purpose (such as a home renovation) outlined by the lender.
Reverse mortgage requirements
HECM reverse mortgages have a number of requirements that homeowners must meet in order to qualify for a loan. The borrower must:
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Be age 62 or older.
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Fully own the home or owe very little on the mortgage.
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Live in the home as a primary residence.
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Not owe any federal taxes or federal student loans.
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Be able to pay ongoing property taxes, homeowners insurance premiums, and homeowners' association dues.
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Attend a HECM counseling session with a counselor approved by the Department of Housing and Urban Development (HUD).
Learn more: What is PITI, and how does it affect your mortgage?
How much can I borrow with a reverse mortgage?
The “principal limit” is the term for the amount of money you can borrow through a reverse mortgage. The value of your home and the amount of equity in your home may be obvious factors that determine your principal limit, but there are additional considerations that will affect your borrowing limit.
The amount of money you can borrow via a HECM partially depends on the age of the borrower. These kinds of loans are only available to homeowners over the age of 62, but the older you are the more you can borrow. In the case of married homeowners or other co-borrowers, the amount of your reverse mortgage loan is set by the age of the youngest borrower.
The interest rate on your reverse mortgage will also dictate the amount of money you can access. Though you do not make monthly payments with a reverse mortgage, this product still accrues interest over time. The higher your interest rate, the less money you will be able to access via the reverse mortgage.
The good news is that the money you receive from a reverse mortgage is generally tax-free and will not affect your benefits from Social Security or Medicare.
Read more: How much house can I afford?
Who should consider a reverse mortgage?
Casey Fleming, author of The Loan Guide and Buying and Financing Your New Home, explained over email that “[reverse mortgage] money comes to you in one of three ways: all at once, in monthly payments, or only when you need some more.”
While any reverse mortgage borrower can access the equity in their home using any of these three payment options, here’s who should consider each reverse mortgage option.
Lump sum: Best for a specific financial need
Taking your reverse mortgage proceeds as a lump sum will generally only make sense if you have a specific, one-time financial need.
Monthly payments: Best for retirement income
“A homeowner who needs additional cash flow to maintain lifestyle is a good candidate for monthly payments,” said Fleming. A reverse mortgage with monthly payments can allow homeowners to access money from their largest asset without having to sell or move.
This is a common scenario for many retirees who may have diligently paid their mortgage but may not have put money aside for retirement. According to a report from Census.gov, more Americans have home equity than have a retirement account — and the average value of that home equity is considerably higher than the average retirement account balance. Specifically, the report found that 61.9% of Americans owned a home with a median equity value of $174,000 as of 2021, while only 59.5% had a retirement account, with a median value of $79,900.
Reverse mortgage line of credit: Best for occasional financial needs
"A reverse mortgage line of credit is good for a homeowner who has sufficient monthly income but has occasional need for additional cash, such as medical bills," said Fleming.
But according to Fleming, there’s another major advantage to a reverse mortgage line of credit. If you retire while still carrying a mortgage balance, you can get a reverse mortgage offering a payout via a line of credit. This will, in effect, pay off your mortgage, and you may never even need to access the money from the reverse mortgage.
“The single greatest benefit for them is simply not having to make a mortgage payment anymore,” Fleming said. “It's life-changing.”
What is the downside to a reverse mortgage?
A reverse mortgage will not be a good fit for every homeowner. There are some distinct drawbacks to these products that homeowners should keep in mind.
To start, you will have to pay traditional closing costs, including an origination fee, an upfront and annual mortgage insurance premium, and monthly servicing charges. You may not have to pay out of pocket for these charges, as they can often be taken out of the proceeds of your loan, but they will reduce the amount of money you receive.
In addition, the reverse mortgage reduces the equity in your home. This means it is possible that you (or your heirs) will receive little to no money from the sale of your home.
A reverse mortgage may force you or your family to sell the home. “If you move (say into a retirement home) you may be forced to sell if you can't qualify to refinance into a conventional mortgage,” Fleming explained.
Read more: Closing on a house — What to expect and how to prepare
Reverse mortgage pros and cons
Pros
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You can tap equity in your home while continuing to live there.
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You cannot owe more than the house is worth with a HECM reverse mortgage.
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You retain the title to your home.
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Nothing is due on the loan until you move, sell, or die.
Cons
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You must pay fees, charges, and closing costs.
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The loan comes due if you die or can no longer consider the home a primary residence, which can complicate finances for your family.
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You lose equity in your home.
Learn more: How to build equity in your home
Reverse mortgage FAQs
Who really benefits from a reverse mortgage?
A reverse mortgage will benefit homeowners who are at least 62 years old, plan to stay in the home for the long term, and need an extra source of income.
Do you have to pay back a reverse mortgage?
Yes, you have to pay back the money you receive from a reverse mortgage. The amount must be repaid either when you die or move out of the house. A few other circumstances could trigger repayment, too, such as if you stop paying your homeowners insurance or property taxes.
What credit score do you need for a reverse mortgage?
Mortgage lenders do not consider your credit score when approving you for a reverse mortgage.
