What Is a Reverse Annuity Mortgage — How Does It Work?

Article Summary:

A reverse annuity mortgage converts home equity into cash. It does this without you having to sell your home or make monthly payments. This cash helps cover expenses like medical bills or home repairs. Reverse mortgages have specific eligibility requirements and are only for homeowners aged 62 and up.

Paying off your home is an exciting accomplishment, but you still have expenses to pay. Even after paying off the loan, homeowners still have to pay for property taxes, insurance, and home repairs. So what happens if you’re retirement age, want to stay in your home, but can’t afford it? Thankfully, you have options.

A reverse annuity mortgage is specifically for homeowners aged 62 and up who need some extra cash. A reverse mortgage allows qualified homeowners to dip into their home equity without selling their house. They can use this cash to pay for repairs, medical expenses, and more. You have to fit specific qualifications to get a reverse mortgage. Keep reading to learn if you qualify and if a reverse mortgage is right for you.

If you are attracted to the “no-debt” aspect of reverse mortgages but don’t meet the age requirement, consider a shared equity mortgage.

What is a reverse annuity mortgage?

A reverse annuity mortgage is another term for a reverse mortgage. They help senior citizens who own their homes but need extra income. A reverse annuity mortgage converts part of your home equity into cash without your selling the home or making more monthly payments. Homeowners can use this money to pay off debt, make home repairs, or cover other living expenses.

These mortgage loans have specific eligibility requirements. Only those who are at least 62 can obtain reverse mortgages.

A note on terminology. A reverse mortgage is not an annuity in the narrow sense. In that sense, an annuity is a specific type of investment, typically purchased through an insurance company, that provides a reliable return. Read SuperMoney’s Securing Your Retirement With Fixed-Rate Annuities to learn more about this type of investment. Because the ways you can receive money from a reverse mortgage often resemble how you can receive money from an annuity, some people refer to reverse mortgages as “reverse annuity mortgages” or “RAMs.” And, in the broad sense of annuity, “a sum of money payable yearly or at other regular intervals,” it’s hard to find fault with calling reverse mortgages reverse annuity mortgages. However, don’t feel bad if you never made the link. Plenty of people never call reverse mortgages this way.

How does a reverse annuity mortgage work?

In a reverse mortgage, the lender pays the homeowner instead of the homeowner paying the lender. The homeowner only pays interest on the money received. The remaining interest goes into the loan balance.

Just as with a traditional mortgage, your home is collateral in a reverse mortgage loan. Most pay off their reverse mortgages by selling their homes. The heirs will be responsible for paying off the reverse mortgage loan if the borrower dies and they want to keep the house.

Who is eligible?

Here’s a breakdown of the eligibility requirements of reverse mortgages, aka reverse annuity mortgages:

Eligibility requirements

  • Have to be at least 62 years old
  • Property must be the primary residence
  • Cannot have federal debt or be delinquent
  • Must own the home outright or have a low mortgage balance
  • Continue to make payments on property taxes, homeowner’s insurance, and homeowners association fees
  • Receive reverse mortgage counseling from someone approved by the U.S. Department of Housing and Urban Development (HUD)

Types of reverse mortgages

  • Single-purpose reverse mortgage: A single-purpose reverse mortgage is the least expensive and least common reverse mortgage. Borrowers use this loan only for one purpose. This includes remodeling to make the home handicap accessible, completing home repairs, or paying property taxes. The purpose must be preapproved by the lender.
  • Home equity conversion mortgage (HECM): A HECM loan is the most common type of reverse mortgage. The loan can be spent on anything. With this loan, you will never owe more than what the home is worth.
  • Proprietary reverse mortgage: Private lenders issue proprietary reverse mortgages. The government does not back these reverse mortgages. This means they do not offer the same protection for borrowers as other reverse mortgage loans. A proprietary reverse mortgage is best for those who have a high-value home.

How to receive proceeds from a reverse mortgage

There are six different ways you can receive payments from a reverse mortgage. All of them, except for a lump sum, have adjustable interest rates.

  • Equal monthly payments: This is also called a tenure plan. The lender gives steady, monthly payments to the borrower.
  • Equal monthly payments plus a line of credit: The borrower receives monthly payments from the lender. Borrowers who, for whatever reason, need more money can use a line of credit.
  • Line of credit: Borrowers take money as needed. They pay interest on the actual amount borrowed from the credit line.
  • Lump sum: The lender gives all the money to the homeowner at once. A lump sum is the only option that comes with a fixed interest rate.
  • Term payments: The borrower receives the money in equal monthly payments over a set number of years.
  • Term payments plus a line of credit: The lender pays the borrower in equal monthly payments over a set number of years. Borrowers with this arrangement can access their line of credit if they need more money.

Can you lose your home with a reverse annuity mortgage?

The short answer is yes. There are, however, specific situations where this occurs. You can lose your home with a reverse mortgage if you:

  • Don’t pay property taxes or homeowners insurance
  • No longer use the home as your primary residence
  • Die without listing a co-borrower or non-borrowing spouse
  • Don’t keep the home up to FHA standards

Pros and cons of a reverse annuity mortgage

Before committing to a reverse mortgage, carefully consider the pros and cons:

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and the drawbacks to consider.

Pros
  • You can access your home equity without making monthly payments or selling your home
  • The home’s title stays in your name
  • Declining home values do not affect reverse mortgage payments or terms
Cons
  • Debt increases and home equity decreases
  • You must keep paying maintenance, insurance, and property taxes
  • The loan balance increases if interest is not paid off
  • If the homeowner dies before the reverse mortgage is paid off, it can be difficult for heirs to manage

Is a reverse annuity mortgage loan the best option for me?

If you are at least 62 years old and cannot afford to keep living in your home, look into a reverse annuity mortgage. These mortgages are designed to help senior homeowners who have paid off their mortgages (or have substantial equity) but need help affording medical bills, long-term care, home repairs, and more.

Reverse mortgages not what you’re looking for? Web surfing can be fun, but you don’t always find the information you want right away. If you’re looking for mortgage information not related to reverse mortgages, maybe one of the following SuperMoney pages will tell you what you need to know:

  • What is a blanket mortgage? You’ll find this article especially helpful if you want to invest in multiple properties.
  • What is a mortgage note? Some nuts-and-bolts basics about mortgages in general.
  • What is a conforming loan? If you’re a borrower with good credit buying a property with 1–4 units, this article may provide some of the information you’re looking for.
  • What is a qualified mortgage? Are you concerned about the safety and affordability of your mortgage loan options? If so, take a few minutes to read this article.

FAQ

How long do heirs have to pay off reverse annuity mortgage loans?

Heirs have 30 days to pay off the reverse mortgage loan once the owner passes away. Selling the home and using the balance to pay off the loan is a common practice. If the heirs want to keep the home, they will have to pay it off a different way.

Do I have to pay off my primary mortgage to get a reverse mortgage?

To qualify for a reverse mortgage, the majority of the loan must be paid off, or you should own the home outright.

Can I go to any lender for a reverse mortgage?

No. Only specific lenders work with reverse mortgages. Although some big-name lending services offer reverse annuity mortgages, this is not something all lenders offer.

Key takeaways

  • A reverse mortgage is designed specifically for senior citizens who own their homes and need extra cash.
  • Reverse mortgages give seniors an opportunity to stay in their homes when they can’t afford to do so otherwise.
  • A reverse annuity mortgage lets homeowners access their home equity without selling their house. They can use this to pay off various expenses.
  • Debt from a reverse mortgage will need to be paid off either by you or your heirs.
  • The lender pays the homeowner instead of the homeowner paying the lender in a reverse mortgage.
  • You must fit specific requirements to be eligible for a reverse mortgage.
  • Most reverse mortgages use your home as collateral.
  • The heirs pay off the reverse mortgage if the homeowner dies before doing so. But this may not always be as simple and straightforward as it sounds.

Reverse annuity mortgage alternatives

Agreeing to a reverse mortgage is a big decision, affecting both you and your heirs. Weigh the pros and cons carefully before deciding to take out any reverse mortgage. To help you make the best possible decision, SuperMoney provides advanced search and comparison tools that will help you find the best offer.

Before committing to any reverse mortgage, make sure you consider alternatives, such as shared equity agreements, mortgage refinance, and HELOCs. Once you’ve done that, survey reverse mortgage options and offers using SuperMoney’s tools, carefully considering what our real-customer reviews have to say about each lender you consider.

View Article Sources
  1. Are there different types of reverse mortgages? — Consumer Financial Protection Bureau (CFBP)
  2. How the HECM Program Works — U.S. Department of Housing and Urban Development
  3. If I have a reverse mortgage loan, will my children or heirs be able to keep my home after I die? — CFBP
  4. Reverse Mortgages: What Consumers and Lenders Should Know — Federal Deposit Insurance Corporation
  5. Reverse Mortgages — Federal Trade Commission
  6. What is a reverse mortgage? — CFBP
  7. Reverse Mortgage — Los Angeles County Department of Consumer and Business Affairs
  8. Hacking Reverse Mortgages — Massachusetts Institute of Technology
  9. Reverse Annuity Mortgage (RAM) Program — Connecticut Housing Finance Authority
  10. Reverse Mortgage Borrowing and Financial Well-Being of Older Adults — Ohio State University via CFPB
  11. 6 Pros and Cons of Reverse Mortgages — SuperMoney
  12. Alternatives To a Reverse Mortgage for Homeowners — SuperMoney
  13. How Does a Reverse Mortgage Work When You Die? — SuperMoney
  14. Reverse Mortgages for Retirees in Debt: Too Good To Be True? — SuperMoney
  15. Reverse Mortgages: Reviews & Comparisons — SuperMoney
  16. Reverse Mortgages: When Do They Make Sense? — SuperMoney
  17. Securing Your Retirement With Fixed-Rate Annuities — SuperMoney