Reverse Mortgages: The Ultimate Guide
When you get a mortgage, you receive a lump sum upfront to buy your house. Then, you make payments to the lender every month until you pay the amount in full.
On the other hand, with a reverse mortgage, you borrow against a portion of your home's value and the lender pays you. That's the simple explanation. To know if a reverse mortgage is right for you, you need to know the details.
You've come to the right place, so let's dive in.
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.
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. To pay back the loan, the lender may sell the home, the borrower may pay from other sources, or repayment may come out of the borrower's estate.
Why do people get reverse mortgages?
They can be helpful as part of a retirement strategy. Many use reverse mortgages to supplement their income, pay off their mortgage, pay for healthcare, or cover other expenses.
Reverse mortgage requirements
To qualify for a reverse mortgage, you must:
• Be at least 62 years old
• Own a 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 home (pay mortgage insurance, taxes, etc.)
• Not be delinquent on federal debt
Those are the basic requirements. Additional requirements may vary by lender and the type of reverse mortgage you choose.
What types of reverse mortgages are available?
There are three different types of reverse mortgages, which include:
1) Home Equity Conversion Mortgages (HECM)
These are the most popular option, accounting for 99% of reverse mortgages in the U.S., according to the National Reverse Mortgage Lenders Association. They are provided by select lenders and are backed by the U.S. Department of Housing and Urban Development (HUD).
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.
You must meet with a counselor before you can apply so they can explain the costs, implications, and alternative options. The HECM mortgage limit is the lesser of $625,500 or a home's appraised value.
2) Proprietary reverse mortgages
Provided by private lenders, these are for homeowners with properties that appraise for an amount over the HECM limit of $625,500. However, they are often more expensive than HECMs and only make up a small portion of reverse mortgages.
3) Single-purpose reverse mortgages
These are reverse mortgages in which you can only use the funds for one specific purpose, such as to pay for medical bills or a home improvement. They are the cheapest option and are provided by state and local government agencies, and nonprofits. Again, these only account for a small amount of all reverse mortgages.
No matter which type you choose, there will typically be several ways you can get the money.
Reverse mortgage payment options
Here are the common payment options available with reverse mortgage lenders:
• Single disbursement: One lump sum, lower amount than other options
• Term option: Fixed monthly payments for a set amount of time
• Tenure option: Fixed monthly payments as long as you live in your home
• Credit line: Access the equity and withdraw it on an as-needed basis
• Combination: Receive a portion of the money as fixed payment and a portion as a line of credit
Casey Fleming, Author of The Loan Guide: How to Get the Best Possible Mortgage, created the chart below to help borrowers determine which HECM payment option is best for common scenarios.
Note, the availability of payment options will vary by the lender and the mortgage type you choose.
Now let's look at the costs.
The costs for a reverse mortgage include fees and interest.
Reverse mortgage fees
According to Fleming, the fees can include:
• Up-front mortgage insurance (2% of claim amount)
• Origination fee
• Application fee
• Administration fee
• Processing fee
• Appraisal fee
• Credit report fee
• Escrow fee
• Lender’s title insurance premium
• Notary fee
• Recording fee
• Monthly servicing fee
Some lenders offer a broker credit to help cover some of the upfront costs.
Reverse mortgage interest
You will also pay interest. If you don't get a HECM which comes with a fixed interest rate, your rate will usually be variable. Interest adds to the outstanding balance each month. However, you don't pay on the interest until the entire loan becomes due.
Note, you can't write off the interest on your taxes until the loan is paid off. Further, a "non-recourse clause" is available for most reverse mortgages, which ensures you can't owe more than the value of your home when the loan is due.
How much do you get from a reverse mortgage?
The amount of money you can get with a reverse mortgage will depend on several factors.
These include your age, the number of borrowers on the application, the value of the property, the type of loan you are getting, current interest rates, and an assessment of your ability to pay homeowner's insurance and property taxes.
As a general rule, the older you are and more equity you have, the more money you can get.
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.
• No need for repayments initially
• No income requirements to qualify
• You can increase your income stream in retirement
• Maintain ownership of 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
• 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 use it to pay off the conventional loan balance)
Be sure to talk with an unbiased financial advisor if you have any questions or concerns.
If you decide that a reverse mortgage is the right financial move for you, here's 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 not, do you have an expensive home with a high value? In this case, a Proprietary reverse mortgage is a good place to start. For everyone else, HECM is 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.
Once you have a list, create a spreadsheet and compare lenders side-by-side based on their terms, fees, interest rate, total costs, and repayment options. Run all the numbers to find the one that offers the most value for your situation.
To start your search, check out our extensive list of reverse mortgage lenders and even filter them by their fee amount.