A reverse mortgage is a loan taken out against a home’s equity. The borrower is able to receive the loan as a lump sum payment. They can also have them in monthly payments, a line of credit, or some combination of all three. The balance of the loan grows as you receive money from the lender. As long as you have a loan balance, interest accumulates and is added back into the balance. Over the course of time, the balance of your reverse mortgage will increase as your equity in the home decreases.
Reverse Mortgage Qualifications
To get a reverse mortgage, certain criteria must be met. First, the borrower has to be over the age of 62. They must live in a home they own. Fortunately, there are no income requirements, so seniors can take out a reverse mortgage regardless of their income level. The older you are and the more your home is worth, the higher the loan you can receive.
Seniors can still take out a reverse mortgage if they already have a mortgage on their home. However, the amount of the reverse mortgage must be enough to cover the primary mortgage payments. The reverse mortgage borrower still has to pay taxes and insurance on the home.
Types of Reverse Mortgages
There are two types of reverse mortgages. First, a Home Equity Conversion Mortgage (HECM) is a federally backed reverse mortgage. Second, are private reversed mortgages that are backed by the lender and don’t have federal mortgage insurance. According to AARP.org, 90% of reverse mortgages are HECMs.
The amount of a reverse mortgage is based on the home’s appraised value. Borrowers will never receive 100% of the value of their home. Instead, the loan amount is typically between 50% and 70% of the home’s value. HECMs are subject to a Federal Housing Authority cap that limits the loan amount to about $625,000 based on where your home is located.
A reverse mortgage is a loan against the borrower’s home. Once the borrower dies, sells the home, or moves out permanently, the reverse mortgage will be due to the lender. In the event of death or relocation, the home can be sold to cover the cost of the reverse mortgage.
Reverse Mortgage Drawbacks
Seniors who own more expensive homes and who want to borrow more of their home’s value often look to loans. One of the drawbacks of private reverse mortgages is that they have higher costs. Appraisal fees, legal fees, origination fees, monthly service fees, and mortgage insurance premiums are automatically taken out of the loan reducing the amount of money the borrower receives. The fees can be as high as 10% of the home’s value.
What A Reverse Mortgage Is Not
A reverse mortgage is not free money. It’s a loan and it must be repaid when certain conditions occur. That is, when you pass away, move out of the home, or sell the home.
The mortgage is not license for the bank to take away your home. Even when the reverse mortgage is due, the bank doesn’t have free reign to take away the home. Instead, it’s up to the heirs to repay the loan. They may be able to refinance the loan and keep the home.
Real Life Example
Mary is a 70-year-old owner of a 3 bedroom, 2 bathroom house near Fort Lauderdale, Florida. Her home is worth about $250,000. She could receive a HECM in a lump sum or line of credit of $138,536. She could also receive $896 a month for as long as she lives in her home. Mary could use the money to help offset the high cost of medical bills and other monthly living expenses.
*These numbers were calculated using the reverse mortgage calculator from AARP.org.
Government Websites
There are several government websites offering valuable information on reverse mortgages:
- HUD.gov: 10 Things to Know About a Reverse Mortgage
- FTC.gov: Get the Facts Before Cashing in on Your Home’s Value
- Medicare.gov: Paying for Long-Term Care
- U.S. Department of Health and Human Services HHS.gov: Using Your Home Equity to Pay for Long-Term Care
- Federal Citizen Information Center: Scam Alert: Reverse Mortgage Seduction
- ConsumerAction.gov: Refinancing and Reverse Mortgages
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