Key Takeaways
- Homeowners 62 and older can access home equity with a reverse mortgage.
- Reverse mortgages can be good for aging in place and supplementing retirement income.
- They also have drawbacks, including costs and decreased home equity.
Reverse mortgages are specialized home equity loans for homeowners age 62 and up. A reverse mortgage gets its name because instead of the homeowner making payments to a lender, the lender makes payments to the homeowner.
Homeowners who take out a reverse mortgage loan can stay in their homes and don’t have to make payments on the loan until they permanently leave the home – whether they sell it, move out or pass away.
Reverse Mortgage Pros
Increased Security in Retirement
“The most typical use is to pay off existing mortgages and other debt to alleviate the burden of having to make monthly payments on those existing loans,” says Steve Irwin, president of the National Reverse Mortgage Lenders Association. “A reverse mortgage can provide supplementary cash flows or create a standby cash reserve to potentially cover health care costs, major purchases, lifestyle enhancements, in-home care or in-home modifications so those borrowers can effectively age in place.”
Maximum Flexibility for Many Needs
You can choose to take your loan proceeds as a lump sum, monthly payments for a specific term, monthly payments for as long as you remain in the home or as a line of credit to protect you from financial emergencies. You can even combine these options for a truly custom loan.
Stay in Your Home
Your home may be the most valuable thing you own and your biggest source of wealth. But not everyone wants to sell their home and move in order to cash out. With a reverse mortgage, you can stay in your home as long as you like, and you may even be able to use reverse mortgage income to pay for in-home care instead of moving to a facility.
Tax-Free Income
Reverse mortgage payouts are not considered income by the IRS. So even if it feels like you’re getting income each month, you won’t be taxed on it.
No Minimum Credit Score or Income Requirement
Underwriting guidelines for reverse mortgages are not nearly as strict as those for traditional mortgages or home equity loans. Mainly, reverse mortgage lenders want to be sure that you’ll pay your property taxes and homeowners insurance premiums and that you won’t incur tax liens on the home. Even shaky borrowers may qualify for a reverse mortgage by allowing some of their loan proceeds to be held back and used for property-related expenses.
Nonrecourse Loan
Reverse borrowers can choose to receive monthly payments for life (or as long as they live in their home). And they’re not required to make payments on the mortgage balance, so it grows over time. But no matter how much they owe, borrowers cannot be required to repay more than the property is worth. Neither can their heirs.
There are several ways you or your heirs can pay off a reverse mortgage balance:
- Sell the home and keep any remaining proceeds.
- Pay off the balance from other funds.
- Refinance the balance into a traditional mortgage or home equity loan.
- If the balance exceeds the property value, simply turn over the home to the lender and walk away owing nothing.
What this means is you won’t outlive your reverse mortgage income if you receive payments for life.
Cons of Reverse Mortgages
Balance Increases Over Time
“The balance of a reverse mortgage increases over time as interest and fees accumulate,” says Valerie Saunders, president of the National Association of Mortgage Brokers. “This growing debt can significantly reduce the homeowner’s equity in the property in some cases. As the loan balance increases, the amount of equity left in the home decreases, potentially leaving less for heirs. Heirs may need to sell the home to repay the loan.”
More Expensive
Like other mortgages, reverse mortgages come with loan fees and closing costs. However, the charges for reverse mortgages are generally higher than those of traditional home loans – in part because they require mortgage insurance and because their balance grows over time.
Can Impact Eligibility for Low-Income Programs
Programs like Medicaid and Supplemental Security Income require your income and/or savings to be under certain thresholds. You might accidentally exceed those limits if you take your loans proceeds the wrong way and push your bank account balances too high.
Foreclosure Is Possible
Reverse mortgage foreclosure may be on the table. If you leave home for more than 12 months for health or lifestyle reasons, your lender may decide that you’re not using the home as a primary residence and accelerate your loan – meaning you have to pay it off and can no longer draw income from it. Your lender may also start foreclosure proceedings if you fail to pay property taxes, keep up your homeowners insurance or maintain the property in good condition.
When Is a Reverse Mortgage a Good Idea?
A reverse mortgage might make sense if you:
- Plan to stay in your home as long as possible
- Would like more retirement income
- Have high medical or long-term care expenses
- Want to delay taking Social Security benefits
- Need funds to make home improvements or accessibility modifications
- Want to pay off your existing mortgage
Before you apply for a reverse mortgage, make sure you understand the costs and have considered alternatives. A U.S. Department of Housing and Urban Development counselor can offer insight and help you make sense of a reverse mortgage’s terms. Also consider discussing your plans with any family members who may be affected by your decision.
When Is a Reverse Mortgage Wrong for You?
Up-front reverse mortgage costs are not small, so you want to avoid borrowing with one if it’s not a good long-term solution. A reverse mortgage might be a bad idea if:
- You plan to travel extensively.
- Your health might require you to move to a nursing or assisted living facility.
- You might move in the next few years for family reasons or to experience a new lifestyle.
If you decide to move closer to your grandchildren, leave the country or go into assisted living, you’ll have to repay the reverse mortgage. You might be better off renting your home out while you’re gone and using the income to fund your travel or facility fees.
Reverse Mortgage Alternatives
If you’re not sure a reverse mortgage is right for you, consider these alternatives:
If you decide to proceed with a reverse mortgage, carefully review the loan terms, including payout options and repayment rules. Plan to maintain your property and continue paying for homeowners insurance and property taxes.
FAQs
There are three types of reverse mortgages:
- Home Equity Conversion Mortgages, or HECM. These loans are the most popular reverse mortgage by far. They’re administered and insured by the Federal Housing Administration. Loan amounts and fees are limited by law.
- Proprietary reverse mortgages. These portfolio reverse loans are not FHA-insured and are generally used to borrow larger amounts against high-value properties. Lenders set their own rules, and you may not have the same consumer protections.
- Single-purpose reverse mortgages. These are mainly offered by nonprofits or government agencies to help low-income homeowners. They may only be used for lender-specified purposes like home repairs, property taxes, or disability-related or energy-efficient modifications.
There’s a lot of flexibility in how borrowers can structure the receipt of loan proceeds, Irwin says. “They can establish a line of credit to draw on, establish monthly payments for the rest of their life, known as tenure payments, or they can set up term payments for monthly payments for a set period,” he says.
Borrowers can even combine payout methods – for instance, a smaller lump sum plus monthly payments or a lump sum plus credit line. The right payout for you depends on your reasons for borrowing – to pay off bills, supplement your monthly income, put off taking Social Security or have an emergency source of cash.
At least one borrower must be 62 or older for most programs. There can be younger borrowers, but their age will impact the maximum loan amount.
The home must be the borrower’s primary residence, and lenders typically require at least 50% equity in the home. Generally, eligible properties include single-family homes, two- to four-unit homes with one unit occupied by the homeowner and approved condominiums or manufactured homes. Before approval, lenders conduct a financial assessment to determine whether a borrower can meet the loan obligations, including maintaining the home and paying for homeowners insurance and property taxes.
FHA loan borrowers must go through HECM counseling before taking out a reverse mortgage. This counseling helps borrowers understand the terms, costs and details of the reverse mortgage.
The maximum loan amount depends on the age of the youngest borrower, the interest rate on the loan and the property value. HECM loans have maximum loan amounts just like FHA mortgages do, so homeowners with high-value properties who want to borrow more may choose portfolio reverse mortgages that allow higher loan amounts.
If there is an eligible nonborrowing spouse who is younger than the borrower, HECM programs will use that person’s age in calculating the maximum loan amount. So you can’t leave a younger spouse off the application to get a bigger loan.
