Senior homeowners can get a loan against the value of their home and continue to live in it.
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You need to be at least 62 years old to take out a reverse mortgage
A reverse mortgage lets senior homeowners tap into their home equity to get cash without selling or leaving the home
A home equity conversion mortgage (HECM) is a reverse mortgage insured by the FHA
Reverse mortgage disadvantages include high costs that ultimately reduce an inheritance
A mortgage is a loan for buying a home. Seniors who have paid off all or most of their mortgage have a valuable asset on their hands, but they may not have enough money for living expenses. While they could sell the home and use the proceeds from the sale, this might not be possible in their circumstances. Moving may not be worth the headache for older individuals.
These “house-rich, cash-poor” seniors can borrow money by getting a reverse mortgage. A reverse mortgage lets senior homeowners take out a loan against the equity of their home while continuing to live in it. Some reverse mortgages only let you use the money for specific purposes, like home improvements, but other reverse mortgages do not restrict what you can use the money for.
A reverse mortgage may sound similar to a home-equity loan or HELOC, which also lets you borrow money based on the equity of your home. A significant difference is that you don’t have to make monthly payments to the lender on the reverse mortgage so long as you live in the house. (You also don’t need to meet strict financial requirements, like making a certain amount of income or having a certain credit score as you would for a traditional mortgage.)
A reverse mortgage has many downsides. Repayment for a reverse mortgage might only take place after the borrower dies or moves out, in which case the house is usually sold to repay the mortgage lender. If the remaining mortgage balance is high, your loved ones may not receive the inheritance you had planned. Reverse mortgages in general can be very expensive because of the many extra costs and fees that are added to your loan balance in addition to the interest.
Reverse mortgages are complicated and often confusing. Since they are only for older adults, there are many predatory schemes, though the federal government tries to regulate them. We’ll discuss reverse mortgages requirements, repayment, and more with particular attention to the home equity conversion mortgages, which you still may want to approach with caution.
There are three main types of reverse mortgages, based on who backs the mortgage loan.
Offered by some local government agencies and nonprofit organizations, this type of reverse mortgage can only be used for specific purposes, as the name suggests. The lender will specify how the money from the reverse mortgage can be spent, like on home improvements or property taxes. The single-purpose reverse mortgage may not always be available in your area.
These are private loans whose terms vary based on the lender. You may be able to borrow more money, but you may also pay more fees, since this conventional loan isn’t restricted by the government. Proprietary reverse mortgages are useful if your home does not qualify for another type of reverse mortgages, usually because it is a higher-value home and you want to borrow more than is allowed with another mortgage loan.
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Home equity conversion mortgages, also known as HECMs, are government-insured loans backed by Federal Housing Administration (FHA). Just as you can get a government-backed FHA mortgage, you can get a government-backed reverse mortgage through the HECM program.
This reverse mortgage often has lower fees, since the government limits how much a lender can charge, and more payment options when it comes to receiving the loan proceeds.
The home equity conversion mortgage is the most common type, so we’ll be focusing on this type of reverse mortgage.
When you take out a reverse mortgage, you will take out a loan against the value of your home. This does not ensure that your loan will be worth the full value of your house. The lender will pay you money, in a lump sum or other method of payment (more on that later). The money that you borrow will accrue interest, which may be fixed or variable.
There are also other costs to the reverse mortgage, which might be added to the total loan (like closing costs), or that you must continue paying on your own (like homeowners insurance).
While it’s becoming more difficult to get a reverse mortgage at a major bank, other financial institutions like smaller banks and credit unions do still offer them. You can also find reverse mortgage lenders online that specialize in this type of product. There are many reverse mortgage scams, so if you decide to take out a reverse mortgage on your home, make sure to find a reputable lender. Some scams involve fraudulent lenders who never pay out the loan proceeds, while other lenders may try to convince you to take out a reverse mortgage when you don’t really need it, under the guise of necessary home improvements or investment opportunities. If you’re getting a HECM, you must find an FHA-approved lender.
The money you receive from a reverse mortgage may be viewed as income, so it can affect your ability to receive government benefits like Medicaid. If you have concerns, you can speak with an elder law attorney in your area.
You cannot always borrow the entire value of your home because other factors will be considered, including the age of the borrower and the interest rates. There is a maximum loan limit of $822,375 for home equity conversion mortgages in 2021.
Not everyone can get a reverse mortgage loan and not all types of real estate properties will qualify. The HECM program requires borrowers and applicants to go through reverse mortgage counseling, which helps the borrower better understand how a reverse mortgage works.
To take out a HECM:
You must be at least 62 years old. If both spouses plan to be borrowers, they must both be at least 62 years old. Generally the younger you are, the less money you can borrow.
Your mortgage must be fully or mostly paid off. Senior homeowners must typically have at least 50% equity.
You must live in the home as your primary residence. If you leave the home for any reason, which includes staying in long-term care for longer than 12 months, then you may have to repay the loan early.
While there are no hard income or credit score requirements to qualify for a reverse mortgage, the lender will make some sort of financial assessment to make sure you’re not delinquent on any federal debt.
You can only get an HECM for certain types of real estate property — namely, homes that meet FHA guidelines and requirements (most single family homes, HUD approved condominiums, manufactured homes made after a certain date). A reverse mortgage other than an HECM may have different requirements.
You can get the loan proceeds from a home equity conversion mortgage (HECM) in one of the following payment methods:
Lump sum payment: a single disbursement of funds
Term payments: funds are spread out over a set period of time
Tenure payments: funds spread out as long as you live in the home
Line of credit: draw on the loan amount as you desire
Combination: payments of either type plus a line of credit
You do not need to start making repayments on a reverse mortgage until after you move out of the house or die. When this happens, your family or estate may be able to repay the loan so they can keep the house. If they don’t, then the lender will sell the house and use sale proceeds as repayment.
With most HECM loans, you are protected from owing more than what the home is worth when it is sold. For example, you take a reverse mortgage out on your home valued at $500,000. After a few years you pass away, and the loan balance exceeds the new appraisal value of the house. If your family and heirs want to keep the home, they typically need to pay off the appraised value of the house. If not, the mortgage lenders will sell it and only collect up to that new value (which is presumably how much it would be sold for).
Let’s say the opposite happens. The loan balance is much lower than the current appraisal value of the house, which has greatly appreciated. Your estate and your heirs can keep any money left after selling the house and repaying the lender. However, you should not count on this as a planning strategy, since the real estate market fluctuates, and it is never certain when the borrower might pass away or leave the home. In addition, the mortgage balance might be very high due to all the associated costs, which we’ll discuss next.
A reverse mortgage comes with many costly upfront fees. In addition to interest on the reverse mortgage loan, you’ll have to pay the following fees for an HECM loan:
Loan servicing fee
Title fees and recording fees
Upfront mortgage insurance premium
Monthly mortgage insurance premium
When you take out a reverse mortgage loan, you’ll still have to continue paying other maintenance fees related to owning your home:
A reverse mortgage can be a good idea in theory for two reasons. If you are a senior homeowner who needs cash immediately, a reverse mortgage can come in handy. It can supplement your retirement income and provide you with a comfortable place to live. However, there are many downsides to a reverse mortgage that you should weigh before making a decision. The most significant disadvantage of the reverse mortgage is also the simplest — you won’t have as much (or any) money to give your heirs because you will have less equity in your home.
If you’re considering a reverse mortgage, it’s easy not to think about how much money you owe the lender since you don’t have to worry about repaying them until a later date. Some people may assume that later date to be death — which frees them from worrying about their debts and what’s owed to the lender. But consider what happens if you outlive and outspend the loan proceeds. What will you do then?
You should also think about the loved ones and heirs you leave behind. Taking out a reverse mortgage can significantly reduce a potential inheritance you leave for your family members. Your beneficiaries will only receive what’s left after the reverse mortgage balance has been paid. For example, you took a reverse mortgage on your $500,000 house for $300,000. After you pass away, the house is sold for $600,000 — but the mortgage balance is now $450,000. After repaying the lender, your heirs would only be left with $150,000.
The idea of receiving cash in hand for what seems like nothing is alluring, but while you cannot not see it, the costs are adding up. If you just want to renovate your house you might try other types of home improvement loans, or try a sale leaseback, where you sell the home but then lease it for the long term as your primary residence.
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