Reverse Mortgages: The Ultimate Guide

In this article, we are going to teach you everything that you need to know about Reverse Mortgages.

We’ll run through eligibility requirements, types of reverse mortgages, the costs, the limits, alternatives, and finish by answering some frequently asked questions.

The information here will help you understand your options and secure a loan.

What Is A Reverse Mortgage?

A reverse mortgage is a form of home equity loan that is for homeowners who are aged 62 or older. It enables you to exchange a part of your home equity for a cash amount. In this type of loan, the interest is added to the monthly balance, which grows over time. The loan must be repaid by the time that the homeowner,  eligible partner, or joint borrower, sells the property or dies. 

There are several different types of reverse mortgage, the most common one being a Home Equity Conversion Mortgage (HECM). Which one you apply for will depend on your financial needs. The ins and outs of reverse mortgages can be quite complicated and you must be fully informed before you apply for one. Here is a rundown of everything you’ll need to know.

How Do Reverse Mortgages Work?

If you are over the age of 62 and you already own your home outright or you have considerable equity in it (a minimum of 50% paid off), then a reverse mortgage may work for you if you need some liquid assets. You will work with a reverse mortgage specialist who will help you decide which type of reverse mortgage is best for you and to help you find a lender and a program. 

Once you have picked a program and applied for the loan, the lender will check your credit score and review your property and its title, and will have its value appraised. Once the loan is approved, you will receive the fund as a lump sum, a line of credit, or monthly or quarterly payments, depending on your choice. You can then use the money as stipulated in your loan agreement. For example, they may be used for renovations or improvements to your home. In some cases, the use of the money may have no restrictions. 

At such time as the borrower moves the loan will need to be repaid. If the borrower dies before the loan is repaid, their heirs can repay the loan or sell the property to repay the lender. The borrower or heirs receive any money that is left over once the reverse mortgage has been repaid.

Who is Eligible for a Reverse Mortgage?

To qualify for a reverse mortgage, you must be the owner of your home and at least 62 years old. In this instance, you may only borrow against your primary residence, with which you must have at least 50% equity and no more than one primary lien. Usually, only certain types of property qualify for a reverse mortgage. These include:

• A single-family home
• A multi-unit property with no more than four units
• A manufactured home that was not built before June 1976
• A townhome or condo

Types of Reverse Mortgage

There are several types of reverse mortgages. These include:

Home Equity Conversion Mortgage

Home equity conversion mortgages (HECM) are one of the most popular types of reverse mortgages. They are insured by The Federal Housing Administration (FHA). The amount that you can borrow depends on the appraisal value of your home. The allocated money is advanced against your home’s value and interest will accrue on the balance over time. No payments are due until the home is sold or the borrower dies. One of the reasons that HECMs are so popular is that they usually offer lower interest rates. 

Proprietary Reverse Mortgage

Proprietary reverse mortgages are offered by private lenders and are not insured by the FHA. You may need to apply for this type of loan if your home has been appraised above the limit of a HECM claim. These loans are usually the easiest to apply for and the fastest to get.

 Single-Purpose Reverse Mortgage

These are the least costly of all the reverse mortgages. They are provided by local and state governments for specific purposes such as property taxes, home improvements, or repairs. You can typically qualify for this type of loan if you have a low to moderate income. Single-purpose reverse mortgages are only available in certain locations. 

Reverse Mortgage Borrowing Limits Explained

If you qualify for a reverse mortgage, there is no general guideline as to home much money you will receive. Borrowing limits are set by individual lenders. However, if you are applying for an FHA-backed HECM, you will only be able to borrow a percentage of your property’s value or the FHA maximum loan limit ($822,375), whichever is lower. This is because a percentage of your home’s value is used to cover the expenses of your loan and as a financial buffer in case the value of your property depreciates. Borrowing limits may also be adjusted based on your age, credit score, and the reverse mortgage’s interest rate.

The Costs of a Reverse Mortgage 

A HECM includes two primary costs:

• Interest rates: If you receive your loan as a lump sum, your interest rates may be fixed, starting below 3.5%. In other cases, your interest rates will be based on the London Interbank Offered Rate (LIBOR). There will also be an additional amount for the lender. 

• Mortgage insurance premiums: HECM mortgages have a mortgage insurance premium of 2% which is added on upfront. There is an additional annual premium of 0.5%.

The purpose of mortgage insurance is to protect lenders should the borrower default on their loan repayments.  As well as the above fees, lenders may also charge origination fees. The rates for these fees are set by the lender, though typically they range from 1%-2% of the total value of the loan up to $6,000. Other possible fees include credit check fees, property appraisal fees, administration fees, and closing costs. Usually, all the fees are combined in the balance of the loan, so you don’t have to pay them out of pocket. 

Is A Reverse Mortgage Right for Me?

Not everyone benefits from a reverse mortgage. Only certain individuals qualify for this type of loan. Furthermore, the structure of a reverse mortgage means that they are only suitable for certain borrowers. A reverse mortgage might be right for you if:

• You are a senior who is dealing with significant living costs.
• Your savings have become depleted, but you have equity in your primary home.
• You do not have a spouse or family member to inherit your home.

When You Should Avoid a Reverse Mortgage

Although a reverse mortgage can be helpful for some seniors, there are also reasons to avoid them. A reverse option is not a good idea if:

• You can’t find a loan program or lender you can trust.
• You can cover your living expenses by drawing on your life insurance or outside savings.
• You have heirs to your property or people living with you who will need to stay on after the terms of the reverse mortgage end.

Reverse Mortgage Requirements

To be eligible for a reverse mortgage, you must be the primary homeowner and age 62 or older. Other requirements include:

• You must either own your property outright or have paid more than 50% of your mortgage.
• You must be living in the property as your primary residence. 
• You must not have any delinquent debts.
• You must have the financial ability to pay for homeowner’s insurance, property taxes, and any homeowners association fees.

How Are Reverse Mortgages Repaid?

A reverse mortgage must be repaid at the time of the borrower’s death or when they sell their home or move to another primary residence. At such a time the borrower or their heir has the option to repay the loan in full and retain the property, or sell the property and use the proceeds from the sale to repay the loan. Any money that remains after the loan has been repaid can be kept. In certain circumstances, you may need to repay the loan with cash or by selling the property. These include:

• You are the borrower, and you have to move into a senior care facility or live with a family member who will be taking care of you.

• You have family members living with you who wish to retain the property. In this case, you may wish to repay the loan by borrowing against your life insurance policy.

Beware of Reverse Mortgage Scams

Although you can rely on government-backed reverse mortgages, if you are considering working with a private lender or a private company that claims to be a broker for government loans, you should be wary. Here are some tips to help you avoid a reverse mortgage scam:

• Do not respond to unsolicited emails, letters, or advertisements for reverse mortgages.

• Do not sign any loan documents unless you completely understand them. If you are uncertain about the wording of any documents, you should have an attorney review them before signing. 

• Do not accept any money for a home you do not own.

• Be wary of lenders who claim that you can receive a loan without any fees or down payment.

• Be wary of hidden terms within a document that may cause you to lose your property.

Alternatives to Reverse Mortgages

If you don’t qualify for a reverse mortgage, perhaps because you are not yet 62, or if you feel that this type of loan is not for you, there are alternatives. These include:

• A conventional mortgage: This is a loan issued by a private lender such as a credit union or bank. They collect the mortgage payments and pursue foreclosure if you default on your payments.

• A home equity loan: This type of loan allows you to borrow against the value of the equity you have in your home. This being the difference between the market value of your home and how much you owe on your mortgage.

• A home equity credit line: This is a variable interest rate loan for which your home is used as collateral. Rather than getting all the money upfront, you can draw against your line of credit as you need money then pay interest on the amount that you borrow.

• Borrow against a life insurance policy: You can borrow against a whole or permanent life insurance policy. The insurance company uses the policy as collateral against the loan.

Reverse Mortgage Pros and Cons

Here is a rundown of the upsides and downsides of a reverse mortgage:

Pros

• It can be used to cover expenses later in life, such as home repairs or medical bills.

• All the additional fees can be rolled into the total cost of the loan.

• Compared to other types of mortgages, reverse mortgage interest rates are competitive.

• A reverse mortgage does not have to be repaid out of pocket.

Cons

• The total reverse mortgage cost, including the additional fees, can be considerable.

• For your heirs to inherit your property, the loan must be repaid.

• To qualify, you must own your home outright or have at least 50% equity.                         

• You must be wary of fraudulent lenders.

• Most reverse mortgages require mortgage insurance.

Reverse Mortgage FAQs

How much money can I borrow with a reverse mortgage?

The amount of money you can borrow with this type of loan will depend on several factors including your age, the value of your property, your financial assessment, current interest rates, and the type of reverse mortgage you apply for. 

Do I still own my house with a reverse mortgage?

Just like with any type of mortgage, you still own your property. In the event of your death, however, the loan must be paid in full. If you or your heirs are unable to repay the loan, then the lender may sell the property to recoup any money owed. In this situation, if the house is sold for less than the value of the loan, neither you nor your beneficiaries are responsible for any remaining debt.

What can a reverse mortgage be used for?

Depending on the type and terms of the reverse mortgage, the loan may be used for home repairs or renovations or out-of-pocket medical expenses.

What’s the difference between a reverse mortgage and a regular home equity loan?

Unlike a home equity loan, with a reverse mortgage, you do not have to repay the loan until you no longer live in the home as your primary residence or in the event of your death.

Are reverse mortgages a scam?

In and of themselves reverse mortgages are not scams. However, there are unscrupulous companies that make fraudulent claims and try to exploit consumers. If you are unsure of how to find a reverse mortgage lender you can trust, check out the FHA list of legitimate lenders here. Choosing a lender that has a lot of experience with reverse mortgages is wise. Beware of any lender who tries to get you to buy a financial product such as insurance or an annuity in order to get a reverse mortgage. This is illegal.  

Why must I get counseling before applying for a reverse mortgage?

The federal government mandates counseling before a borrower can take out a HECM reverse mortgage. All counselors are trained specifically for this service and approved by HUD (the U.S. Department of Housing and Urban Development). Your counselor will answer all your questions and provide you with unbiased information regarding your loan. They will also explain alternative reverse mortgages to a HECM, repayment terms, and additional costs. After counseling, you will be equipped with the knowledge to make an informed decision about a reverse mortgage. There is a small fee for counseling which is payable upfront. You can find a counselor here.

What happens if the sale of my home is not enough to repay the loan?

Providing that the home is sold for at least the balance of the mortgage or 95% of the value at appraisal, the FHA will usually cover any amount remaining. Your heirs are not responsible for the debt. 

Can I add another borrower to a reverse mortgage?

You are not permitted to add a co-borrower to the reverse mortgage after signing.

Who should I contact if I think I am being scammed by a fraudulent lender?

If you have been contacted by an individual or company that offers to help you find or qualify for a reverse mortgage or you suspect fraud, you can report this to the U.S. Department of Housing and Urban Development (HUD) Office of the Inspector General Hotline by calling 800-347-3735 or emailing  hotline@hudoig.gov. 

If you are considering taking out a reverse mortgage, make sure you find a lender your can trust. You can find out more about this type of loan here.