Reverse mortgages are often advertised as a great way for cash-strapped older homeowners and retired persons to get spending money without having to give up their homes. Usually, the minimum age for requirement a reverse mortgage is 62. In some cases, you might be able to get one if you're younger, for example, after turning 55.
But are these mortgages all that great? Reverse mortgages are complicated, risky, and expensive. And in many circumstances, the lender can foreclose. Getting a reverse mortgage usually isn't a good idea, even if you meet the minimum age requirement.
With a reverse mortgage, you take out a loan against the equity in your home. Unlike with a regular mortgage, the lender makes payments to you with a reverse mortgage.
The loan must be paid back when you die, move, transfer title, or sell the home. However, if you breach the terms of the loan contract, the lender might call the loan due earlier.
The three main types of reverse mortgages are Home Equity Conversion Mortgages, proprietary reverse mortgages, and single-use reverse mortgages.
A Home Equity Conversion Mortgages (HECM), pronounced "heck-um," is the most popular type of reverse mortgage.
The Federal Housing Administration (FHA) insures HECMs. This insurance benefits the lender, not the homeowner. The insurance kicks in when the borrower defaults on the loan and the house isn't worth enough to pay back the lender in full through a foreclosure sale or another liquidation process. The FHA compensates the lender for the loss.
To get a HECM, you must meet strict requirements for approval, including a minimum age requirement. You can receive HECM payments in a lump sum (subject to some restrictions), as monthly payments, as a line of credit, or as a combination of monthly payments and a line of credit.
Proprietary reverse mortgages aren't federally insured. This kind of reverse mortgage might be a "jumbo reverse mortgage" (only people with very high-value homes can get them) or another type of reverse mortgage, like one targeted at people age 55 and over.
Another kind of reverse mortgage is a "single-use" reverse mortgage, which is also called a "deferred payment loan." This kind of reverse mortgage is a need-based loan for a special purpose, like paying property taxes or paying for home repairs.
This article focuses on HECMs.
Again, the minimum age requirement for a HECM reverse mortgage is 62. There is no upper age limit to get a HECM reverse mortgage.
Reverse mortgages don't have credit or income requirements. The amount you can borrow is based on your home's value, current interest rates, and your age. Also, how much of your home's value you can draw out is limited. As of 2022, the most money available with a HECM is $970,800. Also, a borrower may get only 60% of the loan at closing or in the first year, subject to a few exceptions.
Other HECM eligibility requirements include the following:
Yes, when both spouses own the home, both need to be 62 to qualify for a HECM. However, a spouse younger than 62 can be listed on a HECM as an eligible nonborrowing spouse.
In the past, people used to get around the HECM minimum age requirement by deeding the property's title to the older spouse. Then, they left the younger spouse off the reverse mortgage.
But this tactic caused problems because once the borrower died, the surviving spouse (who wasn't named on the loan) was often told they had to repay the loan immediately, or else the lender would foreclose.
In 2013, a federal court ruled that the HUD regulation that allows lenders to demand that surviving spouses immediately repay reverse mortgage loans upon the death of their spouses violates federal law. Under revised HUD guidelines:
(Learn more in Nolo's article Reverse Mortgages: Foreclosure Protections for Nonborrowing Spouses.)
If you're thinking about taking out a reverse mortgage with a nonborrowing spouse, be very careful and be sure to talk to a lawyer or HUD-approved housing counselor to learn how to protect the nonborrowing spouse in this situation adequately.
The average lifespan in the U.S. is almost 80 years. Reverse mortgages provide a finite number of payments. You could run out of money if you take out a reverse mortgage at the minimum age.
If you use up the equity in your home early on, you might not have enough money (or equity to borrow against) to cover your later expenses. You might find yourself in a position where you can't afford your health care costs, you won't be able to leave money to your heirs, or pay the taxes, insurance, and upkeep for the property.
Also, to get a reverse mortgage, you'll typically first have to pay off any existing mortgage with the reverse mortgage funds. Other downsides include:
Reverse mortgages have significant downsides, like being risky, complicated, and expensive. If you need access to cash, a few other options for you to consider as an alternative to taking out a reverse mortgage include the following.
You might consider taking out a home equity loan or line of credit. However, you'll have to meet credit and income requirements to qualify and make payments to repay the loan.
If you currently have a mortgage on your home, you could refinance it to lower the payments. Again, you'll have to meet credit and income requirements and make monthly payments.
Also, taking out a new 30-year mortgage when you're close to retirement might cause issues in the future when you have higher health care costs. Consider getting a mortgage with a shorter term, like a 10- or 15-year mortgage.
You could apply for a loan modification if you have an existing mortgage. A modification generally lowers the monthly payments by reducing the interest rate or extending the term.
Selling your home and moving to a more affordable place could be the best way to lower your overall expenses.
You could apply for federal, state, or local programs that provide financial assistance (to pay property taxes or make home repairs, for example) to seniors.
State and local programs often help older homeowners pay for utilities, make fuel payments, and complete home repairs. Many counties and local tax offices have programs to help pay property taxes. To get information about benefit programs in your area, go to benefitscheckup.org.
Again, reverse mortgages are complicated. You should proceed cautiously if you're considering taking out this kind of loan. To get details about the pros and cons of taking out a reverse mortgage, visit the AARP website, the Consumer Financial Protection Bureau (CFPB) website, and Federal Trade Commission (FTC) website.
To talk to a counselor from an independent government-approved housing counseling agency, go to HUD's website, where you'll find a list of counselors. Or call HUD at 800-569-4287 to learn more about how HECMs work. These counselors can also provide information about proprietary reverse mortgages and single-use reverse mortgages.
While federal law requires that borrowers talk to a loan counselor before taking out a HECM, not all counselors effectively explain the legal intricacies concerning reverse mortgages. Even after a long counseling session, many borrowers still don't fully understand all the reverse mortgage terms and requirements.
Because reverse mortgages are very complex and have serious consequences, consider also talking to an elder law or consumer protection attorney, or financial advisor. If you're concerned about a reverse mortgage foreclosure, speak to a foreclosure lawyer in your state.