A reverse mortgage is a type of loan that enables homeowners to borrow against the equity they have in their homes. What makes it distinct from other types of loans, like home equity loans, is that the homeowner doesn’t have to make any payments during their lifetime. The loan is repaid in full only when the homeowner passes away, sells their home, or moves.
Reverse mortgages accumulate interest just like traditional loans. When it’s time to repay the loan, both the principal amount borrowed and all accumulated interest must be paid back.
Reverse mortgages can be a way for older homeowners to get cash in their retirement years without selling their homes. Homeowners can receive their loan as a lump sum, in monthly installment payments, or as a line of credit.
Borrowers do not need to make any payments on a reverse mortgage until one of these conditions is met:
Once any one of these conditions is met, the loan must be paid back with all accumulated interest within one to six months, depending on what state you reside in.
In many cases, surviving family members choose to sell the home to repay a reverse mortgage. Reverse mortgages are required to be structured so that your estate cannot be forced to pay back more than the market value of the home at the time it is sold. So, if the market declines and the value of your home falls, your estate won’t be on the hook to repay the lost value.
Reverse mortgages can also be repaid without selling the home. Surviving family members can refinance the home or repay the loan on their own.
Reverse mortgages are often used by older individuals whose wealth is mainly concentrated in their homes. You may own a home that is worth a lot of money, but you don’t want to sell it because you still live there. If you don’t have any other assets that can be easily sold, it may become difficult to pay for everyday expenses, property taxes, and the upkeep of your home.
What makes a reverse mortgage potentially attractive is that it doesn’t require you to make any loan repayments during your lifetime. So, there’s no chance of falling behind on payments.
Reverse mortgage companies also don’t require you to have any income, nor do they check your credit score when making loan offers. The amount you can borrow is based primarily on the value of your home.
There are three types of reverse mortgages available:
Borrowers can receive funds from a reverse mortgage in several different ways:
Many lenders also offer the option to receive smaller monthly payments in combination with a line of credit.
To qualify for a reverse mortgage, you must own your home and use it as your primary residence. If you have an outstanding mortgage balance, you can use some of the proceeds from your reverse mortgage to pay off your remaining mortgage.
HECM loans require that homeowners are at least 62 years old. You must also speak with an independent counselor who is approved by the Department of Housing and Urban Development to learn more about reverse mortgage basics before you can apply for a loan.
Proprietary reverse mortgages require that homeowners are at least 55 years old. There is no requirement for counseling.
Reverse mortgages typically do not have income or credit score requirements, unlike traditional loans.
The amount you can borrow with a reverse mortgage depends on a number of factors.
Every reverse mortgage requires a thorough appraisal of your home’s value. Of course, owning a more valuable home enables you to borrow more money. You can never borrow 100% of your home’s value since lenders must account for the interest you’ll accrue and risk the value of your home declining.
In addition, older borrowers can typically borrow more money than younger borrowers. Lower interest rates also enable you to borrow more.
The payment method you choose will also impact the amount you can borrow. The best reverse mortgage lenders typically offer smaller loans if you choose a lump sum payment rather than if you choose monthly payments or a line of credit.
Most borrowers can expect to borrow around 60%-80% of their home’s value through a reverse mortgage. Keep in mind that you need to budget for property taxes, homeowners insurance, and upkeep, or else you could face foreclosure.
The maximum loan amount for federal-backed HECM reverse mortgages is $1,089,300. There is no upper limit for proprietary reverse mortgages.
Reverse mortgage interest rates can be fixed or variable, just like rates for traditional mortgages. They also go up or down as interest rates across the economy rise and fall.
Most reverse mortgages come with significant upfront fees, including origination fees, closing costs, and reverse mortgage insurance premiums. These fees can usually be paid with the loan proceeds when your reverse mortgage is issued.
It is possible to refinance a reverse mortgage. However, reverse mortgages have high upfront costs, so refinancing should only be considered under specific circumstances. You might consider refinancing your reverse mortgage if:
Choosing the right lender for your reverse mortgage is very important. Different lenders offer different interest rates and fees. They may also let you borrow different amounts for your home or offer different payment structures for your loan.
When choosing a reverse mortgage lender, the most important factors to consider are: