What is a reverse mortgage?
A reverse mortgage is a type of loan that pays current mortgages for homeowners over the age of 55, and can then be paid tax-free by opposing the fairness of their home.
Homeowners usually use reverse mortgages.
- Supplementary retirement income
- Pay off high profit obligations
- Pay for home repairs and improvements (for example, adding accessibility features)
- Covers medical expenses
Also, some homeowners will use reverse mortgages to delay obtaining Social Security until the age of 70. Additionally, some reverse mortgages allow borrowers to purchase new major housing.
“In situations where normal income or available savings are not enough to cover costs, reverse mortgages can prevent seniors from turning to luxury credit lines or other more expensive loans.”
How do reverse mortgages work?
Reverse mortgages can be complicated. This is the basics.
How much can I borrow?
To become a candidate for a reverse mortgage, you need a significant amount of capital in your home. However, even if you pay off your major mortgage, you won’t be able to borrow the entire value of your home.
In the case of HECM, the amount that a homeowner can borrow, known as the main limit, depends on the age of the youngest borrower or eligible borrower’s spouse, current interest rates, HECM mortgage limits – $1,149,825 in 2024, $1,149,825 in 2025, and the value of the home.
The older you get, the more likely you are to be eligible for a higher principal limit. Also, if you get a variable rate HECM, you may be able to borrow more.
How will you be paid?
The type of HECM you select determines your payment options. With a variety of interest rates, payment options include:
- Equal monthly payments if the property remains at least one borrower’s primary residence
- Equal monthly payments for a certain period
- You can access credit lines until it’s gone
- As long as you live in the home, a combination of a line of credit and a fixed monthly payment
- In addition to credit line combinations, fixed monthly payments for a set period
If you choose HECM with a fixed interest rate instead, you will receive a one-time temporary payment.
How do you pay back your reverse mortgage?
Your reverse mortgage is paid when you are not living in the home. There are several ways to pay off your loan.
- Selling a house: Either you or your heirs can sell the house and cover the loan. If revenue is still there, you or your heirs can maintain them.
- Hand over the house to the lender: If the loan balance is higher than the property’s value, the heir may give the lender a home to meet the debt.
- Repayment of loan balance: If your heirs want to maintain the home, they can either pay the lender a full loan balance or pay 95% of the home’s valuation.
While you don’t need to pay back your reverse mortgage while you live in the home, you will need to pay for your homeowner’s insurance, property taxes, homeowner association membership fees, and home maintenance fees.
How much does a reverse mortgage cost?
With HECM reverse mortgages, you will need to pay the following closure fees, just like a standard purchasing mortgage:
- Mortgage insurance premiums (MIPS): There is an initial MIP of 2% at the time of closing and an annual MIP equal to 0.5% of the outstanding loan balance. MIPs can lend you a loan.
- Origination fee: To process your HECM loan, your lender will charge you $2,500 or 2% of the first $200,000 in the value of your home, or 2% of 2%, plus 1% of the amount over $200,000. The maximum fee is $6,000.
- Service charges: Lenders can charge a monthly fee to maintain and monitor HECM for the life of the loan. This monthly service fee cannot exceed $30 on a fixed or annual adjusted interest loan. Also, if the fee is adjusted monthly, it is $35.
- Third Party Pricing: Third parties can also charge their own fees, such as ratings, home inspections, credit checks, title search and title insurance, and recording fees.
Your reverse mortgage also earns interest monthly. You can roll these fees into your loan balance. Intermediate mortgage interest rates vary from lender to lender, but tend to be higher than regular mortgage interest rates.
Reverse mortgage requirements
To be eligible for a HECM reverse mortgage, the primary borrower must be 62 years of age or older. Other requirements are:
- You own your home entirely or have paid off most of your mortgage
- Living in your home as your main residence
- Reverse mortgage counselors taking part in an explanatory session provided by the U.S. Agency for Housing and Urban Development
- It’s up to date on all federal debts
- Continue to pay homeowner insurance, property taxes and homeowner association membership fees
Types of reverse mortgages
Here are the types of reverse mortgages you may find:
- Home Equity Conversion Home Loan: HECM, the most popular type of reverse mortgage, is insured by the FHA. You can choose how you can receive payments at once, such as a fixed monthly payment or a credit line. Although HECM is widely available, it is only provided by FHA-approved lenders and all borrowers should consult with a US Housing and Urban Development Authorised reverse mortgage counselor before closing.
- Unique reverse mortgage: This is a loan provided by a private reverse mortgage lender and is not insured by the government. Some unique reverse mortgage options allow you to take your loan at 55 instead of 62. Usually, you can also receive greater loan advancements, especially if you have a high-paying home.
- Single-purpose reverse mortgage: This is a loan from a state or local agency or nonprofit organization, as it is not as common as HECM or its own reverse mortgage. Generally, it is the cheapest of the three options, but you can use a loan to cover one purpose, such as handicap accessible modifications.
Pros and cons of reverse mortgage
Reverse mortgage loans can be a useful tool, but they are not without their drawbacks.
Is a reverse mortgage perfect for you?
For many homeowners, reverse mortgages allow you to stay at home at your age while receiving tax-free income. Many people use their funds to supplement Social Security, cover medical expenses, pay for home care, and improve or modify their homes.
“Reverse mortgages make sense primarily for those who answer “yes” to these questions. Do I need additional income to pay my bill? Are you planning to stay at home? says Jeff Ostrovsky, principal writer and housing market analyst at Bankrate.
However, remember. Not all reverse mortgage lenders use high pressure sales tactics, but some use them to attract borrowers. Please proceed with caution.
“Reverse mortgages create several breathing chambers in your budget, but borrowers should be careful,” says Ostrowski. “Lenders are actively selling these products and the rates can be steep.”
Reverse mortgage replacement
If it’s not for sale by removing a reverse mortgage, consider these other options.
- Home Equity Loan or Home Equity Credit (HELOC): With both options, you can rent up to 85% for your home equity in most cases. However, with a home equity loan, you will need to make monthly payments. HELOC allows you to make payments after the draw period has ended. Interest rates and fees for both options tend to be lower than those for reverse mortgages.
- Refinance: If you haven’t paid back your mortgage yet, refinancing to a lower rate loan can lead to lower monthly payments. You can also refinance for a loan in the long term. For example, if you have 10 years left on your loan, you can refinance your loan for a 20-year term. This will significantly reduce your monthly payments, but you will generally be paying interest. You can also investigate cash out refinances.
- Shared Stock Agreements: With this arrangement you will partner with the company to get money in exchange for a percentage of your home’s value – and often so are future appreciation. Like reverse mortgages, you are not obligated to make monthly payments with this option, but your money (technically an investment rather than a loan) must be repaid when the term ends.
