What Is a Reverse Mortgage?
You’ve saved up a nest egg to fund your retirement, but despite all of your hard work planning and saving, you’re worried you might need some extra income to fully enjoy retirement. A reverse mortgage can be a terrific way to access funds by making the equity in your home more liquid. Access to extra cash each month can help you manage planned and unplanned expenses and maintain your standard of living. If you’re uncertain about how reverse mortgages work, don’t worry, you’re not alone. Let’s clear the air about this often-misunderstood financial tool.
What is a reverse mortgage?
A reverse mortgage is a loan that you take out using the equity you’ve established in your home. As the name implies, a reverse mortgage flips the roles of the lender and the borrower. In this case, the lender pays money to the borrower based on that equity. Keep in mind that while the lender will make monthly payments to the borrower, you are still responsible for any applicable taxes*, homeowner’s insurance and association fees.
With a traditional mortgage, every payment you make builds equity in your home. Eventually, you’ll own a larger share of your house than the bank does, and one day, you’ll pay off that loan in full.
In many cases, that equity isn’t available to homeowners until they sell their property or take out a home equity loan. With a reverse mortgage, however, you can access a portion of your equity.
Common uses include, daily necessities, in-homecare or medications, home repairs or renovations, supplementing your retirement income, or purchasing a new home.
Whether you have investments and want to make your saving last longer, or you’re worried about making ends meet after you reach retirement age, and you have a lot of equity in your home, a reverse mortgage can help in many ways as it creates tax free cashflow you can access anytime.
Reverse Mortgage Pros are standing by
Older homeowners control $13.95 trillion in home equity** and are typically facing a shortfall in liquid retirement savings*** as well as many economic risks as they enjoy a longer retirement. Accessing your housing wealth through reverse mortgage financing may offer greater financial freedom and peace of mind.
Get started with one of our Reverse Mortgage pros who will walk you through the process and discuss the products that will work best for your needs.
Run your numbers to see how much you qualify for in as few as five minutes.
How reverse mortgages work
Although there are different types of reverse mortgages to consider, the basic idea always remains the same: The bank or lender extends loan payments to the borrower using equity you’ve already paid into the property. It’s almost like getting past mortgage payments back into your pocket — at a cost, of course.
Those payments can come in monthly installments, lump sum deposits or a line of credit to draw from them, whatever payment options make the most sense for you.
Like all mortgages, the loan must be paid back, of course, but only when you no longer live in the home as your primary residence or fail to meet loan terms with respect to paying property taxes, Homeowners' Insurance, HOA dues (if applicable) and maintain the condition of the home.
How do you qualify for a reverse mortgage?
Reverse mortgages are specialized financial tools created with the express purpose of giving homeowners 55 & over extra money to draw from which can be used for any purpose. There are several criteria you must meet to qualify for this type of loan:
- Be at least age 62 & older for the Home Equity Conversion Mortgage (HECM), or age 55 & older for Proprietary Reverse Mortgage programs (state restrictions may apply)
- Occupy the property as your primary residence
- Typically own 55% or more of your equity****
What are the benefits of a reverse mortgage vs a home equity line of credit?
Transferring some of the equity you’ve put into your home into cash can be a great way to empower yourself with additional cashflow. Compared with a home equity loan, in particular, reverse mortgages have a lot to offer:
- No pressure to make a mortgage payment at any time, even if interest rates increase
- Your line of credit will never be frozen or decreased if interest rates go up
- Your maximum available line of credit grows over time providing greater access to equity – even if your home’s market value declines
Reverse mortgages are designed specifically for older homeowners, helping you enjoy greater financial freedom and peace of mind in retirement. It’s hard to put a price on the emotional and financial security afforded by reverse mortgages.
How much money can you access?
The payout from a reverse mortgage depends on several factors:
- Your age
- The market value of your home
- How much equity have you built up
- How up to date you are with other financial obligations like property taxes
- The current interest rates
In general, lower interest rates and being an older borrower with higher equity will qualify you to receive access to more equity.
Know the different types of reverse mortgages
Lenders usually offer three types of reverse mortgages:
- Home Equity Conversion Mortgages (HECM)
- Proprietary Reverse mortgages
- Purchase reverse mortgages
Consumer Protections
Counseling: Mandatory third-party FHA-approved counseling ensures borrowers make informed decisions about reverse mortgages.
Non-Borrowing Spouse Protections: Eligible non-borrowing spouse protections are designed to safeguard the rights and living conditions of spouses who might otherwise be at risk of losing their homes upon the death or relocation of the borrowing spouse.
Protections include: Continued residency and a deferral of loan repayment.
No Prepayment Penalty: The loan can be repaid at any time without penalty, and borrowers can refinance if needed.
Mortgage Insurance: The MIP serves as a critical element in the HECM program by providing financial protection to the lender and, indirectly, to the borrower. It ensures that in cases where the loan balance exceeds the home's value at the time of loan maturity, FHA insurance will cover the shortfall, thereby making the loan a non-recourse debt.
This protects borrowers or their estates from owing more than the home is worth, thus eliminating the risk of an additional financial burden beyond the value of the home
Non-Recourse Protection: The non-recourse feature of reverse mortgages provides significant value to borrowers by ensuring that they or their heirs will never owe more than the value of the home when the loan becomes due.
Clearing up common misconceptions about reverse mortgages
Reverse mortgages often seem too good to be true, prompting skepticism. Despite potential risks, these tools offer notable benefits and are often misunderstood regarding property ownership, debt exceeding home value, inheritance impacts, and time constraints.
Some of the most common misconceptions about how reverse mortgages work revolve around these concerns:
Who owns the property?
Many fear losing home ownership with a reverse mortgage. In reality, the title remains with the homeowner (just like other mortgages), allowing property transfer to heirs and maintaining all homeowner rights, such as renovations and sales, provided financial obligations like taxes and insurance are met.Heirs will need to obtain new financing under their name to payoff the Reverse Mortgage loan.
What happens if you owe more than the house is worth?
One of the most common misconceptions about reverse mortgages is that you or your heirs will need to pay the deficit if you wind up owing more than your house is worth. But that’s not true. Reverse mortgages are non-recourse loans, so no repayment of the excess amount is required. Mortgage insurance covers any remaining balance after selling the home. If the sale exceeds the debt, the surplus goes to the beneficiaries.
Will you have fewer assets to pass down to your heirs?
That depends on how you use those funds. Using a reverse mortgage does typically reduce home equity depending on the amount you borrow and how you use the equity in your home. However, ample research exists that suggest strategically integrating home equity into your retirement income strategy might increase overall estate value.
Always consult with your Financial Advisor and Reverse Mortgage Specialist on how a Reverse Mortgage can be used as an asset strategy.
What time limits are imposed on a reverse mortgage?
Concerns about time constraints for selling the property post-borrower's death are common. Typically, heirs have six months with possible 90-day extensions to manage the estate, providing flexibility in fulfilling the loan obligations
It is important that your heirs continue to communicate and work with the servicer during this process.
What if I leave the home for an extended period of time?
If a reverse mortgage borrower must vacate their home for an extended period, for instance, to enter a nursing home or undergo extensive medical treatment. In such scenarios, the reverse mortgage stipulates specific conditions regarding the occupancy of the home. The loan typically becomes due and payable if the home is not the principal residence of the borrower for a period exceeding 12 consecutive months.
What are the downsides to a reverse mortgage?
While reverse mortgages offer unique benefits, they also have some drawbacks to consider. Here's a closer look at potential downsides:Origination fees
Like traditional mortgages, reverse mortgages come with closing costs, including origination fees and FHA mortgage insurance costs of 2% of the home’s appraised value.Loss of equity
The payout from a reverse mortgage reduces the equity you’ve built in your home. Borrowers should carefully weigh how much equity they’re willing to use in exchange for the loan benefits.
How can I get started on a reverse mortgage?
Reverse mortgages can unlock the equity in your home, providing financial flexibility while allowing you to stay in the house you love. However, this comes at the cost of reduced home equity — and potentially a smaller inheritance for your heirs.
As with any major financial decision, it’s important to weigh the pros and cons. Consulting a Reverse Mortgage Specialist can help you evaluate your options and determine if this solution aligns with your needs. In the right circumstances, a reverse mortgage can be a powerful tool for financial stability.
*Rate does not provide tax advice. Please contact your tax adviser for any tax related questions.
** Source: https://www.nrmlaonline.org/about/press-releases/senior-home-equity-stands-at-13-95-trillion
*** Source: https://www.aarp.org/money/retirement/older-americans-lack-savings-gao-estimates/
****The amount you can borrower depends on your age, expected interest rate and the value of your home.
This is not a commitment to lend. Reverse mortgages are eligible for borrowers 62 and older. Age limits for on proprietary Reverse Jumbo start at age 55 and may vary by state. . Borrower must pay property taxes, Homeowner’s insurance, HOA dues (as applicable), and additional fees, if any, to maintain the condition of the home and using it as primary residence or the loan will need to be repaid. Otherwise, the loan must be repaid when the last borrower passes away or sells the home. Prices, guidelines and minimum requirements are subject to change without notice. Some products may not be available in all states. Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision. This material has not been reviewed, approved or issued by HUD, FHA or any government agency. Rate is not affiliated with or acting on behalf of or at the direction of HUD, FHA or any other government agency. To find a Reverse Mortgage counselor near you, search the HECM Counselor Roster at https://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call (800) 569-4287.
