How Do Reverse Mortgages Differ From Traditional Mortgages?

Reverse mortgages share some qualities of traditional mortgages: Both represent liens against your property, both can be refinanced and paid off, and both share similar lending processes.

However, reverse mortgages differ from conventional loans in that they typically require that borrowers are 62 years of age or older. They also require no credit, employment or asset qualifications, and do not have to be repaid until you die, sell your home, or move out of your home permanently. You don’t need an income to qualify for a reverse mortgage, and you also are not required to make monthly payments on a reverse mortgage.

There are different types of reverse mortgage products:

A Home Equity Conversion Mortgage (HECM), which is the most established reverse-mortgage product. HECMs are insured through the Federal Housing Administration, and maximum loan limits are $625,500 . Mortgage qualification is calculated based on your age, appraised home value, and current interest rates.
A CHIP Reverse Mortgage for Seniors, which offers Canadian homeowners aged 62 or older up to $500,000 tax-free with no payments required until the owners move out or the home is sold. Qualification is based upon age and gender of the homeowners, appraised value of the home, marital status, property type, and location.

Reverse mortgages also fall into three different general categories:

Single-purpose loans, which are offered by some state and local government agencies as well as nonprofit organizations
Federally insured loans, also known as HECMs.
Proprietary reverse mortgages, which are private loans backed by the companies that have developed them.

How Will A Reverse Mortgage Affect Me?

Though some homeowners may worry that a reverse mortgage may affect their taxes, these loans are not taxable, nor do they affect Social Security or Medicare benefits. As a borrower, you also retain the title to your home throughout the life of the loan.

Since a reverse mortgage can also be used as a line of credit, this is often a preferable option to a standard credit line provided you qualify. For example, in order to qualify for a home equity line of credit, you must not only have a sufficient debt-to-income ratio, but are required to make monthly payments. A reverse mortgage has neither of these requirements. In general, the older you are, the more your home is worth, and the lower your interest rate, the more money you’ll receive from a reverse mortgage. To compare a HECM to a HELOC, consult the calculator here.

Another loan product you might want to consider is a reverse annuity mortgage. This is a contract under which a homeowner borrows against his or her home equity and receives regular monthly tax-free payments from the lender. In other words, this allows a homeowner aged 62 or older to live off the equity from a fully paid-off house. Upon the owner’s death, the bank receives the title to the property.

By law, the borrower’s son or daughter can also arrange a reverse annuity mortgage with his or her parents, which provides the parents with cash and the child with tax benefits. Consult an attorney before entering into this type of agreement.

Is A Reverse Mortgage Safe?

Reverse mortgages are quite safe given that they are non-recourse loans, meaning they do not need to be paid off while the borrower is alive or remains in the home.

That said, the fact that reverse mortgages are safe does not necessarily mean they are the right mortgage product for your individual needs. Do your own research and assess your financial needs carefully before signing on the dotted line.