Reverse Mortgages
If you’re an older homeowner who’s looking for a way to stay in your home and create funds for your retirement, consider a reverse mortgage. It offers a way for you to use home equity as a financial resource, creating greater flexibility for retirement funding.
Interest in reverse mortgages has been fueled by increases in home equity, due largely to rising home values, and the desire of older people to stay in their homes as long as possible (age in place).
What is a reverse mortgage?
First, what is home equity? It’s the difference between what you owe on your home (mortgage) and what your home is worth. A reverse mortgage is one way older homeowners can turn that equity into cash.
A reverse mortgage allows homeowners age 62 or older (55+ for some proprietary reverse mortgages) to borrow against the equity in their home, and receive the funds as a lump sum, fixed monthly payment, or line of credit. The loan doesn’t have to be repaid until the borrower sells the home, moves out, or passes away.
How does a reverse mortgage work?
With a traditional mortgage, you borrow money to buy or refinance a home and make monthly principal and interest payments to the lender until you pay off the loan. With a reverse mortgage, you borrow money based on your home equity (and other factors) and receive the funds directly, but you don’t have to make monthly payments to the lender. It’s important to know that you still have to pay your property taxes, homeowners insurance, HOA dues (if applicable), and maintain your home properly.
Types of reverse mortgages
There’s more than one kind of reverse mortgage. Here’s an overview of the main types.
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The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). HECMs offer several disbursement options, including lump sum, line of credit, and monthly payments. They are widely accessible as they do not have income or medical requirements, but borrowers must be at least 62 years old, have significant home equity, and live in the home as their primary residence.
What properties are eligible for reverse mortgages?
You may be surprised to know that reverse mortgages are not just for single family homes. Because there are specific guidelines for different types of property, it’s important to work with an experienced reverse mortgage loan originator, but these properties are generally eligible for reverse mortgages:
- Single family
- 2-4 unit
- HUD-approved condominiums
- Manufactured homes
- Townhouses
- FHA-approved planned unit developments (PUDs)
- Mixed-use properties
- Co-ops in certain areas
Reverse mortgage pros and cons
There are plusses and minuses to any mortgage, but reverse mortgages in particular have raised questions over the years.
Pros
- Borrowers can access funds without selling their home
- Monthly mortgage payments are optional
- Funds can be received as a line of credit, lump sum, monthly payment, or combination
- Borrowers can use funds as they wish, including to supplement their retirement income
- Borrowers can use the funds to defer Social Security and pension payments
- The loan doesn’t have to be repaid until the borrower sells the home, moves out, or passes away
- Even if the loan balance is greater than the home’s value, the lender must accept the proceeds of the home sale as full payment of the loan
Cons
- Closing costs can be higher than a traditional mortgage (particularly HECMs)
- HECMs require an upfront mortgage insurance premium and monthly mortgage insurance (can be included in the loan)
- Most reverse mortgages have variable interest rates that may rise, but they also have interest rate caps to limit the increases
- Interest accrues over the life of the loan, adding to the loan balance if the borrower decides not to make loan payments
- Borrowers must have funds to pay property taxes, homeowners insurance, HOA dues (if applicable), and maintain the home properly
Reverse mortgage requirements
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The primary borrower must be at least 62 years old (55 for certain proprietary products). The home must be the primary residence with sufficient equity, and the borrower must be able to pay ongoing expenses such as property taxes, homeowners insurance, HOA dues (if applicable), and maintenance.
