What's a Reverse Mortgage?

Learn about reverse mortgages.

A "reverse mortgage" allows people who are 62 and older to draw upon their home equity in order to receive a lump sum 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 loan agreement. But is a reverse mortgage a good idea?

Read on to get the lowdown on reverse mortgages including what they are, how they work, how much money you can get, as well as the upsides and downsides.

Home Equity Conversion Mortgages

The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM). HECMs are FHA-insured, which means the insurance comes into play 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.

How Does a Reverse Mortgage Work?

In a regular "forward" mortgage, the borrower gets a lump sum of money from the lender, and then makes monthly payments towards repaying the money, including interest. In a reverse mortgage, rather than getting a lump sum that has to be steadily paid back, the homeowner typically receives periodic payments from the lender, which become the loan. Though, the lender's payments to the borrower may be in the form of a lump sum (subject to some limitations), monthly payments, or a line of credit you can draw on as needed. You can also get a combination of monthly installments and a line of credit.

The loan doesn't have to be repaid until:

  • The home is no longer the borrower's principal place of residence. (The borrower might 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.
  • The borrower dies and and the property is not the principal residence of at least one surviving borrower (subject to some exceptions—see Reverse Mortgages: Foreclosure Protections for Non-Borrowing Spouses.)
  • The borrower breaches the loan agreement, like by not paying the property taxes, not having homeowners’ insurance on the property, or not keeping the home in a reasonable condition.

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. Reverse mortgages generally don't require a credit or income test. However, they do require financial counseling from a HUD-approved HECM counselor.

To get a reverse mortgage, you also have to:

  • occupy the property as your principal residence
  • not be delinquent on any federal debt, and
  • have financial resources to be able to continue making timely payment of ongoing property expenses, like property taxes, homeowners' insurance, and homeowners' association (HOA) fees.
(To learn more about the restrictions and requirements the government has placed on HECMs, see Reverse Mortgages: Restrictions and Requirements.)

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.

As of January 2018, the most money available with a HECM $679,650. Also, a borrower may get only 60% of the loan at closing or in the first year, subject to a few exceptions.

Upsides and Downsides to a Reverse Mortgage

Reverse mortgages are sometimes worthwhile for retirees whose incomes are low but whose houses are valuable. 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, to finance a move, or leave to your heirs. (You can still leave the home to your heirs, but they’ll have to repay the loan. To learn more, see If I get a reverse mortgage, can I leave my home to my heirs?)

Getting Help

It's recommended that you proceed cautiously if you're considering taking out a reverse mortgage. Reverse mortgages are very complicated. HECM counselors have reported that it often takes at least a couple of hours to explain how these mortgages work and cover all of the topics—including costs and consequences—that borrowers need to understand before taking out this kind of loan.

Even after a HECM counseling session, many borrowers still don’t fully understand all of the reverse mortgage terms and requirements. If you go through a HECM counseling session, but feel you need more information, consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer. If you’re concerned about a reverse mortgage foreclosure, consider talking to a foreclosure lawyer in your state.

Also, be sure to watch out for reverse mortgage scams.

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