Reverse Mortgages for Retirees and Seniors

Learn about reverse mortgages.

A reverse mortgage allows people who are 62 and older to draw upon home equity in order to receive a chunk of money, a line of credit, or monthly income (or a combination of these), without having to pay back the loan until they die, move, sell the home, or breach the mortgage agreement. But is a reverse mortgage a good idea?

Here's the lowdown on reverse mortgages: what they are, how much you can borrow, as well as the upsides and downsides.

How Does a Reverse Mortgage Work?

In a reverse mortgage or home-equity conversion mortgage (HECM), which is the most popular type of reverse mortgage, you trade equity in your home in return for money from a bank or other lender.

HECMs are FHA-insured, which means the insurance comes into play if the borrower defaults on your loan (breaches the mortgage agreement) or if the loan is accelerated (called due) for one of the reasons listed below and the house isn't worth enough to pay back the lender in full through a foreclosure sale. In those cases, the FHA will compensate the lender for the loss.

The lender's payments to the borrower may be in the form of a lump sum, monthly payments, or a line of credit you can draw on as needed, or a combination of these options.

The loan doesn't have to be repaid until:

  • The home is no longer the borrower's principal place of residence. (The borrower may still own the property, but live somewhere else most of the time.)
  • The borrower moves out due to a physical or mental illness, and is gone for more than 12 consecutive months.
  • The borrower sells the home.
  • The borrower transfers the home’s title (ownership) to someone else, or
  • The borrower dies.

After any of these occurrences, the lender may accelerate the loan and then the loan must be repaid plus interest and fees. Otherwise, the lender will foreclose.

Who Can Get a Reverse Mortgage?

Reverse mortgages are generally available to any homeowner over the age of 62 who has substantial equity in the home. Many reverse mortgages don't require a credit or income test. However, they do require financial counseling.

How Much Can You Borrow?

The amount you can borrow is based on your home's value, current interest rates, and your age. Also, there are limits to how much of your home's value you can draw out.

The most money available with a HECM is $636,150 (as of January 1, 2017)—no matter how much equity a person has in the home. Also, a borrower may get only 60% of the loan at closing or in the first year, subject to a few exceptions.

Are You a Good Candidate for a Reverse Mortgage?

To determine if you are a good candidate for a reverse mortgage, consider the following:

How long will you live in the house? Closing costs on reverse mortgages can be high. So, if you plan to move in a year or two (an that event would terminate the reverse mortgage), it doesn't make financial sense to get a reverse mortgage.

Are you retired with a low income and a valuable house? Reverse mortgages are sometimes worthwhile for retirees whose incomes are low but whose houses are valuable.

Consider Edna, age 85, who owns her house outright. The house is worth about $500,000, but Edna's savings are almost exhausted and her Social Security income barely pays enough to cover her personal expenses -- with nothing left over to cover the costs of maintaining and insuring her house. Edna gets a reverse mortgage. She immediately borrows $10,000 so that she can replace her deteriorating roof, and then arranges to receive a payment of $1,000 per month. Even allowing for loan costs and interest, and assuming Edna lives into her mid-90s, she will not come close to exhausting her $500,000 in equity.

Upsides and Downsides to a Reverse Mortgage

Reverse mortgages have certain advantages for some people, like if you have a lot of equity, but not much cash. Then a reverse mortgage might be a good way to get some spending money. But for most people, a reverse mortgage is a bad idea.

Reverse mortgages have significant downsides:

  • Reverse mortgages are expensive due to closing costs, interest, servicing fees, mortgage insurance, and other fees.
  • If your health declines and you have to move into a care facility, like a nursing home, the lender can call the loan due after you’ve been out of the home for more than 12 months. You’ll then have to pay back the loan or the lender will foreclose.
  • A reverse mortgage could affect your eligibility for Medicaid because recipients under those programs cannot have more than a certain amount of money in their checking account on a monthly basis.
  • If you don’t pay the property taxes or homeowners’ insurance (assuming you don't have a set-aside account), fail to keep the property in reasonable shape, or breach any of the other mortgage requirements, the lender can foreclose. Reverse mortgage lenders have reputation for foreclosing on elderly homeowners for relatively minor mortgage violations
  • By taking out a reverse mortgage, you spend down the equity in the property, which means you won't be able to access it later on to cover costs for things like long-term health care costs or to finance a move.

Getting Help

It's recommended that you proceed cautiously if you are considering taking out a reverse mortgage. Be sure that you know the risks and watch out for reverse mortgage scams—and consider talking to consider talking to a financial planner or elder-law attorney first.

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