If you have significant home equity but little retirement income, a reverse mortgage may be beneficial. Homeowners 62 years or older can borrow against the equity in their home and receive funds from a lender through a reverse mortgage. This money can be utilized for living expenditures and home upgrades without requiring you to relocate or make monthly loan payments.
When you obtain a reverse mortgage, you retain ownership of your home and use the proceeds to pay off any remaining mortgage balance.
A reverse mortgage is a term that refers to a loan that is reversed.
A reverse mortgage is a loan that allows you to access the equity in your home in the form of a flat sum, a line of credit, or a stream of monthly payments.
Unlike a conventional mortgage (also known as a forward mortgage) or a second mortgage, a reverse mortgage does not require you to make payments as long as you continue to live in the home as your primary residence. However, you must repay your existing mortgage at the time of or prior to closing on your reverse mortgage.
If you die or permanently relocate, you must repay the loan. This is often accomplished through the sale of the home. Alternatively, you or your heirs can return the loan or pay the lender 95% of the appraised value of the home and retain the home.
If the value of your home grows throughout the term of your reverse mortgage, any excess value will be distributed to you or your estate. This also occurs if you die, sell, or move before fully utilizing the equity in your loan.
If the value of your home drops during the term of your reverse mortgage, neither you nor your estate will be required to make up the difference. This benefit is made possible by the reverse mortgage insurance premiums you will pay.
How to determine your eligibility for a reverse mortgage
To qualify for a reverse mortgage, you must meet the following criteria:
At least 62 years of age
Possess one of the following eligible property types: single-family home, two- to four-unit home (as long as one unit is occupied), condominium recognized by HUD or the FHA, or mobile home certified by the FHA.
Maintain the property as your primary home.
Possess the financial means to maintain homeowners insurance, property taxes, and upkeep, as well as, if necessary, flood insurance and homeowners association dues.
Own your home outright or have a minimum of 50% equity in it
Attend a reverse mortgage counseling session recognized by HUD.
Not be in arrears on any federal obligation (such as taxes or student loans)
Types of reverse mortgages
There are three types of reverse mortgages you can consider for your situation.
- Home Equity Conversion Mortgage (HECM): The most common type of reverse mortgage, the HECM is insured by the Federal Housing Administration and available only through FHA-approved reverse mortgage lenders. You can use these loans for any purpose.
- Proprietary reverse mortgage: A less-common type of reverse mortgage for owners of homes valued above the FHA’s limit, which is $765,600 in 2020. Sometimes called a jumbo reverse mortgage.
- Single-purpose reverse mortgage: A less-common type of reverse mortgage for low- to moderate-income seniors who need funds for home repairs, home improvements, or property taxes. Unlike HECMs, these loans can only be used for one purpose specified by the lender.
How reverse mortgages work
A reverse mortgage gives you access to a portion of your home equity, called the initial principal limit. This limit depends on four factors:
- Your age: Lenders factor in the age of the youngest borrower or eligible non-borrowing spouse. Younger borrowers receive less money due to their life expectancy being longer.
- Current interest rates: Higher interest rates reduce borrowing power.
- The value of your home: The amount you can borrow is partially based on the lesser of your home’s appraised value, the FHA limit, or the sales price. In 2020, the FHA limit is $765,600, and the sales price is only factored in if you’re using a HECM for purchase.
- How much you owe on your current mortgage (if applicable): If you don’t own your home outright or have at least 50% equity in your home, you won’t be able to receive a reverse mortgage.
When a reverse mortgage might be for you
- You want to age in place and your home can accommodate it.
- Your home needs accessibility improvements for aging in place.
- You don’t care about leaving your home to your heirs.
- You want or need cash, and you can’t qualify for a mortgage refinance, home equity loan, or home equity line of credit, perhaps because you have bad credit.
- You can afford to keep up indefinitely with homeowners insurance, taxes, and maintenance.
When a reverse mortgage might not be for you
- You rely on certain government need-based benefits, such as Medicaid or Supplemental Security Income (SSI), which may be disrupted if you take out a reverse mortgage.
- You want someone to inherit your home free and clear of any debt when you die.
- You think you may want to move. (A HECM for Purchase may be an option if you want to move and still be a homeowner.)
- Your health might require you to move into an assisted living or nursing facility for more than 12 months.
- Your spouse will not be a co-borrower. A non-borrowing spouse will not receive any further reverse mortgage proceeds after a borrowing spouse dies, and in some circumstances, they may not be able to keep living in the home. (Eligibility is determined when you apply.)