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How to shop for reverse mortgages
If you are nearing retirement and are worried about your liquid assets, reverse mortgages may help supplement your income.
The U.S. Department of Housing and Urban Development (HUD) launched the Home Equity Conversion Mortgage (HECM) program in 1990. Since then, the agency has extended roughly 1.25 million federally-insured reverse mortgages to Americans 62 years of age and older.
But what is a reverse mortgage? And is it right for you? Here’s everything you need to know.
What is a reverse mortgage?
A reverse mortgage is a loan for qualified borrowers who want to convert part of the equity in their home into cash. Usually, this money is tax-free and can be used for any purpose.
The borrower keeps the title of the house and is still responsible for paying property taxes, utilities, home insurance, maintenance, and related costs.
Different options are available for loan disbursements, such as receiving a lump sum, a line of credit, or monthly payments.
Interest is added to the loan each month, but the borrower doesn’t have to make any payments on the loan while living in the house.
One of the most convenient aspects of a reverse mortgage is that, as long as the borrower continues to meet requirements (living in the home, paying property taxes, etc.), no monthly payment is required on the loan.
The borrower certainly has the option to make monthly payments, which they may do if they plan to leave the house to family members in their will, but the borrower is not obligated to make those payments.
How does a reverse mortgage work?
You apply with a lender to borrow against the equity you have in your home. Upon approval, a lien will be placed against your home, and you will begin to receive the payments (or will gain access to a lump sum or credit line). You will not initially make any payments on the money you borrow.
With a regular mortgage, you have to make monthly payments until the property is paid for. In the case of reverse mortgages, the lender pays you, and you don’t have to pay it back for as long as you live in your home.
Money from a reverse mortgage is usually tax-free and is secured by the equity in your home. However, if you sell the house, you do have to repay the loan. If you die, your estate is on the hook for repaying the mortgage. Usually, that means selling the house.
You don’t have to make monthly payments with a reverse mortgage. And you get to keep the title to your home. However, you do have to pay property taxes and homeowner’s insurance. And you have to keep your home in good repair.
An important thing to keep in mind is that, with a reverse mortgage, interest and fees are added to the balance every month. So, the amount the homeowner owes to the lender goes up — not down — over time. As the balance increases, your home equity decreases.
How do you pay back a reverse mortgage?
When the last surviving borrower on the reverse mortgage meets one of the qualifying events for repayment, the loan will become due. Qualifying events include death, selling the home, or not living in the home anymore. If the qualifying event is death, the lender will sell the home to repay the reverse mortgage. If it is something else, the borrower will pay the balance back. Borrowers can do so by selling the home and using the proceeds to repay the mortgage, using other sources of cash to repay it, or refinancing the amount.
Why do people get reverse mortgages?
Reverse mortgages can be helpful as a part of a retirement strategy. Many people use them to supplement their income, pay off their mortgage, pay for health care, or cover other expenses.
What are the most important factors you should consider when shopping for a reverse mortgage?
If you decide to go ahead with a reverse mortgage, shop around for the best deal. Make sure the type of reverse mortgage you choose is the right one for your needs. The rates, fees, terms, and features of reverse mortgages vary significantly from one lender to another. Checking quotes from multiple lenders could save you and your family a lot of money.
Here are some factors you should consider when comparing reverse mortgages:
- Type of reverse mortgage: There are three types of reverse mortgages: single-purpose, proprietary (also known as private), and Home Equity Conversion Mortgages (HECM).
- The value of your home: This may determine which reverse mortgage type is best for you.
- Fees and costs: The cost of origination fees, interest rates, servicing fees, and closing costs vary from lender to lender.
- Total annual loan cost: Reverse mortgages are complicated financial products that are hard to compare. The total annual loan cost helps you understand the yearly average cost of a reverse mortgage.
- The reputation of lender: If you suspect a scam or a salesperson pressures you into using the money from the reverse mortgage to buy additional financial products, walk away.
Don’t rush into buying a reverse mortgage. Consider these factors carefully before you make a decision. In the next several sections, we’ll go over some questions that will help you as you compare reverse mortgages.
What types of reverse mortgages should you consider?
There are three types of reverse mortgages to choose from. Some are exclusive to specific lenders, so it’s essential to know which one you want when comparing reverse mortgages.
Single-purpose reverse mortgages (property tax deferral programs)
Single-purpose reverse mortgages are like regular reverse mortgages, but they have the added requirement that the borrower must use the loan to pay for a specific approved item, such as a home repair or property taxes. Interest and fees for this type of reverse mortgage are typically lower than for other types.
This type of loan is not widely available. Only select nonprofit organizations and state and local governments offer it. In fact, they make up only a small portion of reverse mortgages.
Each state can set requirements for the loan and may not disburse cash to the borrower directly. Instead, they sometimes pay for the item directly.
These mortgages are not federally insured and are often only available for older homeowners with low to moderate incomes.
If you want a reverse mortgage to finance home repairs, property taxes, or home improvements, you should consider a single-purpose reverse mortgage.
Visit eldercare.gov or call your local Area Agency on Aging and ask about local grants and loan programs for home repairs and improvements.
Proprietary reverse mortgages (jumbo reverse mortgages)
These reverse mortgages are private loans that are not backed by a federal agency. Proprietary reverse mortgages are ideal for senior borrowers with home values that exceed the maximum limit set by HECM for their state.
Since the loan amounts are higher and come with more risk, the loans also usually have higher interest rates. These are typically insured by private lenders and banks.
Proprietary reverse mortgages are a good option for homeowners with expensive homes who want to get the highest possible loan amount.
Home Equity Conversion Mortgages (HECMs)
HECMs are the most common reverse mortgages, making up about 90% of them. A program of the U. S. Department of Housing and Urban Development (HUD), they are insured by the Federal Housing Administration (FHA).
These are available to borrowers who live in homes with values below the maximum limit, which, according to HUD, is $822,375 for the 2021 calendar year. They can be used for any purpose and have no income or medical requirements.
The downside is that the upfront costs can be high, and the allowable loan-to-value is low compared to other home equity loan options.
Home equity conversion mortgages are the most common type of reverse mortgage. They also have the most forgiving eligibility requirements.
HECM requirements for reverse mortgage borrowers
To qualify for a HECM, you must:
- Be at least 62 years old.
- Own your home outright or have a low remaining balance that can be paid off at closing using the reverse mortgage loan.
- Have resources to pay for the ongoing costs of maintaining the home (insurance, taxes, etc.).
- Live in the home as your primary residence.
- Complete financial counseling with a HUD-certified professional.
- Meet financial eligibility obligations set by the HUD.
HECM home requirements
A borrower’s home can be a single-family home, a two-to-four-unit home where the borrower lives in one unit, or a HUD-approved manufactured home or condo that meets FHA requirements.
HECM loan amounts
The amount you can borrow will depend on the interest rate and the age of the youngest eligible non-borrowing spouse or borrower. The appraised value of the home can’t exceed the maximum limit of $822,375 (as of 2021). The older you are, the more you can borrow.
You can get this type of reverse mortgage through any FHA-approved lender.
What payment options will you have?
One of the primary considerations when comparing reverse mortgages is how you will receive your money. Your options when receiving funds from your reverse mortgage include the following:
- Lump-sum option: Receive a single lump-sum disbursement when the mortgage closes. This option usually offers the lowest loan amounts. Available on fixed-rate loans.
- Equity line option: Gain access to the loan as a line of credit. You draw money whenever you want until you use up your line of credit. This method can save you money because you only pay interest on the amount you use. Available with adjustable interest rates.
- Tenure option: Receive equal monthly payments as long as you live in the house as your principal residence. Available with adjustable interest rates.
- Term option: Receive equal monthly payments for a fixed period. Available with adjustable interest rates.
- Combination option: Some lenders will also provide a combination of two method payments, such as a line of credit and monthly payments. Home equity conversion mortgages (HECM) offer the most flexibility. Available with adjustable interest rates.
Casey Fleming, mortgage advisor and author of The Loan Guide: How to Get the Best Possible Mortgage, created this chart to help borrowers decide which payment option is best for them:
What reverse mortgage costs should you expect?
There are often origination fees, closing costs, servicing fees, and interest involved with reverse mortgages. With a HECM, you will be required to get FHA mortgage insurance , which has an upfront and annual cost.
The initial mortgage insurance premium is 2%, which can be financed as part of your loan. The annual mortgage insurance premium will end up equaling 0.5% of the outstanding mortgage balance.
HECM closing costs can include the costs for inspections, surveys, mortgage taxes, appraisals, title searches, recording fees, and more. HECM origination fees compensate the lender for processing your loan.
Lenders can charge $2,500 or 2% of the first $200,000 of your home’s value (whichever is greater) plus 1% of the amount over $200,000, up to $6,000. Lenders may also charge servicing fees over the life of the loan, up to $35 per month. Some lenders offer a broker credit to help cover some of the upfront costs.
Lastly, interest will accrue each month and will be added to the amount you owe. Fixed and adjustable rates are available.
As for writing off the interest on your taxes, it won’t become tax-deductible until after you pay it, which is usually when the loan is paid off in full.
Which reverse mortgages have the lowest costs?
Single-purpose reverse mortgages usually have the lowest fees and rates. The trade-off is that they are hard to find, and you can only use them for the purpose determined by the lender.
Reverse mortgages are complicated financial products. It is often a challenge to calculate their cost precisely, which makes it challenging to compare reverse mortgages.
When you talk to a lender about a reverse mortgage, ask for the Total Annual Loan Cost (TALC) rate of the loan. This rate has a similar function to APR in regular loans. It provides the projected annual average cost of a reverse mortgage including all the itemized costs lenders add on to the loan.
Which reverse mortgages offer the largest loan amounts?
You probably figured this one out for yourself from the information above, but let’s make sure there’s no confusion. The maximum loan amount you can get with a reverse mortgage depends on the following factors:
- Your age.
- The type of reverse mortgage you select.
- Value of your home.
- Current interest rates.
- Financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance.
Typically, the older you are, the more equity you can squeeze out of your reverse mortgage.
Proprietary reverse mortgages are not restricted by the federal limits HECMs have to follow. Currently (as of 2021), the maximum loan amount for a HECM is $822,375. This makes proprietary reverse mortgages you best option if (1) you have a high-value home, and (2) getting the largest possible loan amount is your priority.
Who can get a reverse mortgage?
Reverse mortgage age limits can vary by the type of reverse mortgage you get. For HECMs, the minimum age is 62. There will be other requirements as well. Here’s a typical list of basic requirements in addition to the age limit:
- Own your home outright (or have a very low balance you can pay off with the reverse mortgage funds).
- Live in the home as your primary place of residence.
- Have no other loans on the house.
- Have financial resources to maintain the home (pay mortgage insurance, taxes, etc.).
- Not be delinquent on federal debt.
Specific requirements can vary by lender and mortgage type. Before applying, be sure to read through all of the eligibility requirements.
Reverse mortgage pros and cons
While there are many pros, there are also important reverse mortgage disadvantages to consider. Here’s a look at both.
Compare the pros and cons to make a better decision.
- No need for repayments initially.
- No income requirements to qualify.
- You can increase your income stream in retirement.
- Maintain ownership of the home.
- You can often roll the costs into the loan so you don’t pay them upfront.
- You are using up the equity in your home which means you will have fewer assets to pass on to your heirs.
- Costs are high, especially for Proprietary and HECM loans.
- The loan will become due if you move somewhere else for 12 months (like a full-time care facility).
- Without a “non-recourse” loan, you can owe more than the property is worth.
- You can’t get a reverse mortgage if you have a conventional mortgage (unless you pay off the latter with the former).
Be sure to talk with an unbiased financial advisor if you have any questions or concerns.
In case you decide that getting a reverse mortgage is the right financial move for you, the next section tells you how to find the best lender.
How to compare reverse mortgage lenders
First, you will want to determine which loan type works best for you. Does a single-purpose reverse mortgage suit your needs? If so, great! That will be the cheapest of the three options. If single-purpose doesn’t suit you, your best option may depend on the value of your home. Do you have an expensive home with a high value? In this case, a proprietary reverse mortgage could be a good choice. For everyone else, HECM is probably the way to go.
The next step is to find lenders who offer the reverse mortgage type you want. Read reviews and company information to find reputable prospects.
To start your search, check out our extensive list of reverse mortgage lenders here. You can even filter them by their fee amount. Other ideas include:
- Talking to a Home Equity Conversions Counselor at the Department of Housing and Urban Development: (800) 569-4287.
- Searching for FHA approved reverse mortgage lenders if you’re looking for a HECM.
- Verifying lenders through the National Mortgage Licensing System (NMLS) Consumer Access.
- Vet reverse mortgage lenders by checking their rating with the Consumer Advocate Group.
Once you have a list, create a spreadsheet and compare lenders side-by-side based on their terms, fees, interest rates, total costs, and repayment options. Run all the numbers to find the one that offers the most value for your situation.
Several alternatives to reverse mortgages
A reverse mortgage can make a lot of sense for some retirees. But it’s not for everyone. For starters, only homeowners who meet the age requirement can apply. You must also live in the home. It can’t be a rental property. Another key factor for qualifying is having enough equity in your home. Reverse mortgages are ideal for homeowners who have paid off their home loans completely or have a very small remaining balance. Even if you do qualify for a reverse mortgage, it may not be the best option for you.
If you decide a reverse mortgage isn’t your best option, there are others you can explore. You can also consider these alternatives:
- Home equity loans: Cash out your home equity with a loan that you’ll repay with monthly payments over a set term.
- Home equity lines of credit: Gain access to your home equity in the form of a credit line that you can make withdrawals from as needed over a set period.
- Cash-out refinance loans: Get a new loan to replace your existing home loan, potentially lower your costs, and cash-out some of your equity.
- Personal loans: Get a loan based on your good credit.
- Downsizing: Sell your home and move into a smaller home to reduce house debt (and possibly net some cash). Or retain ownership of your home and rent it out for less than what you’ll need to cover your own rent, netting some regular income.
- Lowering your expenses and getting debt help.
It’s wise to review all of your options so you can make an informed decision. Which option will benefit you the most?
Another alternative: shared equity agreements
Shared equity agreements are another option for homeowners who want to dip into the equity of their home without having to worry about monthly loan payments.
Companies that offer shared equity agreements give homeowners cash in exchange for a share in the ownership of the property. Here is how shared equity agreements stack up against reverse mortgages.
Loan structure of shared equity agreements vs. reverse mortgages
Although both products offer homeowners a payment-free route to cash, they go about doing it in completely different ways. While reverse mortgages are loans that charge an agreed interest rate, shared equity agreements give investors a share of a home’s future equity appreciation.
The cost of reverse mortgages vs. shared equity agreements
Typically, reverse mortgages have higher fees than shared equity agreements. Just the origination fees of a reverse mortgage are often over $5,000. The cost is much higher if you go for an HECM and ask for a lump-sum payment. Shared equity agreements usually have more affordable closing costs. But the ultimate cost depends on what percentage of appreciation you choose to share and how much your home increases in value.
FAQs on reverse mortgages
Here’s a look at answers to some of the most frequently asked questions about reverse mortgages.
What is a reverse mortgage?
A reverse mortgage is a loan that enables older homeowners, age 62 and older, to convert a portion of their home equity into tax-free cash in the form of loan proceeds while continuing to hold title to their homes, without being required to make monthly mortgage payments.
With a traditional mortgage, you borrow money upfront and pay the loan down over time. A Reverse Mortgage is the opposite — you accumulate the loan over time and pay it all back when you and your spouse (if applicable) are no longer living in the home. Any equity remaining at that time belongs to you or your heirs.
How much equity do you need to have to qualify for a reverse mortgage?
Generally, you need at least 50% equity in your home to qualify for a reverse mortgage. But that number can depend on your individual situation. With a reverse mortgage, the lender pays you.
What happens to a reverse mortgage when you die or sell your home?
If you pass away and are the last surviving borrower or eligible non-borrowing spouse on a reverse mortgage, the loan balance and interest will become due. Your beneficiary will be responsible for paying it in full.
To do so, your beneficiary will have to put your home on the market, sell it, and use the proceeds to pay off the mortgage or pay it off in another way and keep the home. Beneficiaries have 30 days to make a decision and six months to complete the transaction.
Similarly, if you sell your home, the loan balance and accumulated interest will become due, and you will need to pay it.
Are reverse mortgages transferable?
Reverse mortgages are not typically transferable. Instead, when a qualifying event occurs, they must be repaid. If the borrower passes away, the lender can sell the home to repay the debt.
Are heirs responsible for reverse mortgage debt?
No, reverse mortgage heirs do not have to take on the remainder of the loan balance and are not held responsible for paying back the loan. If the loan balance is more than the appraised value of the home, heirs will not have to pay the difference.
So, when is a reverse mortgage a good idea?
A reverse mortgage makes sense if a qualified borrower:
- Is planning to stay in the home for the foreseeable future.
- Isn’t concerned about passing the home to heirs.
- Needs extra money for living expenses.
- Can afford to cover homeowners insurance, property tax, and maintenance costs.
Beyond that, you’ll want to make sure it provides the most value when compared to every other option.
Reverse mortgages are often misunderstood by Americans, resulting in a strong negative bias toward this loan type. But the reality is that a reverse mortgage could be an excellent source of tax-free income for older homeowners who may be limited on funds.
- Reverse mortgages can be a useful tool to supplement your income, pay off debt, or cover health care expenses. But reverse mortgages are not free money. They are loans that you or your heirs will eventually have to pay back.
- So, if you do decide to get one, it is essential to comparison shop before you choose a reverse mortgage lender. SuperMoney’s free reverse mortgage customer reviews and comparison tools are an easy way to filter lenders according to the products and features that matter the most to you.
- To start your search, check out our extensive list of reverse mortgage companies. Compare reverse mortgage consumer ratings, and read the reverse mortgage comparison reviews and opinions.