What is a Reverse Mortgage?

A reverse mortgage is a financial tool that lets homeowners—usually 62 or older—turn part of their home’s equity into cash without selling or making monthly payments. Instead of you paying the lender, the lender pays you, either through a lump sum, monthly checks, a line of credit, or a mix of those.

Say you’ve built up equity, your house is worth $400,000 and you owe nothing on it. A reverse mortgage lets you tap into a chunk of that value, maybe $200,000, depending on your age, home value, and interest rates. You keep living in the house, and the loan doesn’t come due until you move out, sell, or pass away. At that point, the house is typically sold to repay the loan, including interest that’s been piling up.

You’re still responsible for property taxes, insurance, and upkeep just like a forward mortgage.

The most common type, a Home Equity Conversion Mortgage (HECM), is backed by the federal government, so it’s got some guardrails, like a mandatory counseling to make sure you understand the program

It’s not free money either—the loan balance does grow over time—but it can free up cash for things like travel, bills, or just enjoying retirement. Think of it as a way to spend your home’s value while still calling it home and you always retain ownership of your home.

How a Reverse Mortgage Works:

• • Borrower Receives Payments: Instead of making monthly payments to a lender, the lender makes payments to the borrower. These payments can be received in various forms:
    • Lump sum: A one-time payment at closing.
    • Monthly payments: Either for a fixed term or for as long as the borrower lives in the home (tenure payments).
    • Line of credit: Borrowers can draw funds as needed up to a limit.
    • Combination: Some combination of the above options.
  • No Monthly Mortgage Payments: Borrowers do not have to make monthly payments towards the loan balance. However, they must continue to pay property taxes, homeowners insurance, and maintain the property.

Reverse Mortgage Key Features:

• • Non-recourse Loan: The borrower or their heirs will never owe more than the value of the home when it’s sold, even if the loan balance exceeds the home’s value (a feature inherent to HECMs).
  • Loan Repayment: The loan becomes due when the last surviving borrower dies, moves out permanently, sells the home, or fails to meet the loan obligations (like paying taxes and insurance). At this point, the loan, including interest and fees, must be repaid, usually through the sale of the home.
  • Equity and Interest: The amount of equity a homeowner can access depends on factors like age, home value, interest rates, and the specific reverse mortgage program. The loan balance grows over time because interest and fees are added to the balance rather than paid monthly.

Types of Reverse Mortgages:

• • HECM (Home Equity Conversion Mortgage): Insured by the FHA, this is the most common type, offering federal protections and standardized terms.
  • Proprietary Reverse Mortgages: Offered by private companies, these might be available to higher-value homes or to those who don’t qualify for a HECM due to age or property value requirements.
  • Single-purpose Reverse Mortgages: Provided by some state and local government agencies or non-profits, these are cheaper but can only be used for one specific purpose, like home repairs or property taxes.

Reverse Mortgage Considerations:

• • Costs: Reverse mortgages come with various fees, including origination fees, mortgage insurance premiums (for HECMs), and closing costs.
  • Impact on Heirs: Heirs can choose to pay off or refinance the reverse mortgage if they want to keep the home. If the home is sold, any remaining equity after the loan repayment goes to the heirs.
  • Counseling: For HECMs, counseling from a HUD-approved counselor is mandatory to ensure borrowers understand the loan’s implications.
  • Financial Implications: While providing immediate cash flow, reverse mortgages reduce the home equity available for inheritance and might affect eligibility for certain government programs.

Reverse mortgages can be a useful financial tool for eligible seniors looking to supplement income, pay for healthcare, or cover living expenses, but they also come with complexities that should be thoroughly understood before proceeding.

Learn more about eligibility requirements for a reverse mortgage, situations where a reverse mortgage is best used, and common myths around reverse mortgage that we debunk with facts