How Does a Reverse Mortgage Work?
Want to learn how a reverse mortgage works? A reverse mortgage allows seniors to convert home equity into cash, receiving payments while retaining home ownership without monthly payments.
What Is a Reverse Mortgage?
A reverse mortgage allows homeowners 62 and older to convert home equity into cash, a line of credit, or monthly payments while retaining home ownership. No monthly mortgage payments are required and you can live in the house as long as you would like as long as you follow program guidelines.
Lifestyle Benefits
Qualifications
*Qualification may depend on attributes such as age, loan amount limits, and home equity
*To learn more about this government loan program via HUD’s, please visit: HECM Program Information
How Does a Reverse Mortgage Work?
A reverse mortgage lets homeowners convert home equity into cash without monthly mortgage payments. Whether you need extra income, a financial cushion, or more flexibility in retirement, understanding the process can help you make an informed decision.
You must be 62 or older, own and live in the home as their primary residence, and have sufficient home equity.
Complete an application and attend a HUD-approved counseling session to understand the loan terms.
The lender orders an appraisal to determine home value and reviews the borrower’s financials.
Funds are distributed in a lump sum, monthly payments, a line of credit, or a combination of these.
Borrowers are responsible for property taxes, homeowners insurance, and home maintenance.
The loan is repaid when you sell the home, move out, or pass away. Any remaining equity belongs to the you or your heirs.
Reverse FAQ
A reverse mortgage is a special loan program created specifically for senior homeowners that allows them to tap into their home equity and continue to reside in their home and defer any payments on the loan.
There are three pieces of information needed to determine how much money is available: the borrower’s age, current interest rates, and the home value.
The most common misconception is that the lender will own your home when you obtain a reverse mortgage and that you will lose any equity you have, which isn’t true. Read about more misconceptions here.
The non-recourse feature is a powerful aspect and states that the homeowner is not responsible if the loan balance grows beyond the home’s value.
The mortgage insurance pays for the non-recourse feature, so that you can never own more than what the home is worth, allows the homeowner to live in the home as long as they want, allows borrowers to have more money to draw in the future, and guarantees that the line of credit can never be frozen or have a balloon payment.
The four following requirements remain somewhat standard for reverse mortgages:
1. Age. With the HECM product, the youngest borrower must be at least 62 years old, however, non-borrowing spouses may be younger than the required age.
2. Homeownership. To qualify for the reverse mortgage, the borrower will become the new homeowner on the new property and will need to occupy it within 60 days.
3. Residency. The home must be the homeowner’s principal residence. This program is not available for second homes or investment properties.
4. Property Type. The accepted list of eligible property types include single-family residences, two-to-four unit properties, when the borrower occupies one unit, townhomes, planned unit developments, modular homes, manufactured homes, and condos.
The fixed-rate HECM is a closed-end loan and only offers a one-time single dispersement of all the funds available to you, but the adjustable-rate HECM has various payout options.
The line of credit option on a reverse mortgage is guaranteed to grow at the same rate as the interest rate and FHA mortgage insurance premium, which is charged on any outstanding loan balance. This not a rate of return on your line of credit like an investment, but a growth in the amount of money you can borrow in the future against your home value.
Yes, you can make payments on your reverse mortgage if you choose, even though they are not required. You can pay partial interest, all the interest, or some principle and interest every month.
A traditional home equity line of credit or HELOC allows the homeowner to access a set amount of equity from their home. HELOCs require the homeowner to make monthly payments based on the current rates and how much they draw out.
Reverse mortgage lines of credit require no monthly payments and are easier to qualify for those 62 and older. The draw period never ends and the line of credit can never be frozen.
Many times, seniors decide to take Social Security early so that they can start to receive the monthly income to help with monthly expenses in retirement. By taking it earlier, though, it reduces how much they will get per month for the rest of their life. Instead of taking your Social Security early, use a reverse mortgage to supplement your income and wait until age 70 to take Social Security. This will allow you to lock in the maximum amount of Social Security available to you.
There are three options available to the heirs:
1. Repay the loan. The heirs can repay the loan by refinance or some other means and keep the house. They also do not have to pay more than 95% of the appraised value of the property.
2. Sell the property. The heirs can sell the property, repay the loan balance, and keep the remaining equity.
3. Deed the home. By transferring the deed to the heir, they can walk away if the loan value exceeds the home value.
A few reasons why a reverse mortgage may not be the best fit are if the homeowner intends to sell the home soon, if the home does not meet their long-term physical needs, if the reverse mortgage offers little current or future advantage, or if there is an adult child still living with the senior homeowner.
Using a reverse mortgage to purchase a home allows those over 62 to right-size into the home they need for retirement, but be able to do that without putting all the proceeds from their previous sale into the new purchase. This can allow the homebuyer to keep money liquid for home improvement, medical needs, or other retirement needs.