Your Financial Future:
Reverse Mortgages: Would One Be Right For You?
What is a reverse mortgage?
- A reverse mortgage is a way for homeowners to borrow against the equity or value of their homes.
- It is a mortgage that pays you a loan – you can receive the loan as a line of credit, a lump sum or a series of monthly payments.
- It works in the reverse of a conventional or forward mortgage. With a reverse mortgage, each time you receive a payment, your equity in your home decreases and your debt increases.
- You never have to repay a reverse mortgage as long as you live in your home.
Who can take out a reverse mortgage?
- You must be at least 62 years old.
- You must apply for the reverse mortgage and complete the paperwork.
- Usually, you must pay off your mortgage or any other debt against the house. You may be able to do this with money you get from a reverse mortgage.
- Generally, your home must be your primary residence – that means you must live in your home for most of the year.
- Single home properties are eligible. Some programs will provide reverse mortgages on condominiums and two- to four-unit properties, if you live in one unit. Mobile homes and cooperative apartments are not eligible.
How much can you receive?
- The reverse mortgage is based on your age and the value of your home.
- The older you are when you take out the reverse mortgage, the more you can receive in each payment.
- The more your home is worth, the more you can receive (up to certain limits).
- The mortgage interest rate and the cost of the loan will also influence the amount you receive. The lower the interest rate, the more you will receive.
- There are limits on the amount you can receive. The limits are determined by the agency through which you take your reverse mortgage and are based on the value of your home and where you live.
How can I receive the money?
- You can choose to receive the money:
- as a line of credit to be accessed as needed (this is the most popular),
- in a lump sum, or
- in regular monthly payment.
- You can also receive a combination, for example, one payment up front plus a series of monthly payments.
- Upfront costs include an origination fee, mortgage insurance premium and closing costs.
- Reverse mortgages can be very expensive in the short term.
- They are less costly the longer you have them.
- A reverse mortgage through the Home Equity Conversion Mortgage (HECM) program is generally the least expensive. Plus, it is federally insured. However, the other two types have higher limits.
Different Types of Reverse Mortgages
- Single-Purpose Reverse Mortgages are offered by various state and local governments and by some nonprofits. They are the cheapest but are less widely available than the other reverse mortgages and can only be used for a purpose specified by the lender. One example is a single-purpose reverse mortgage to be used solely for home repairs.
- Federally Insured Reverse Mortgages are also known as Home Equity Conversion Mortgages (HECMs). They carry the guaranty that, if you receive monthly payments and live longer than expected, you (or your estate) will only owe the amount originally agreed upon. The limit on the loan amount was increased to $625,000 in most places in the U.S. for 2010.
- Proprietary Reverse Mortgages are private loans administered by the private sector. You can ask an HECM counselor to provide you with resources to compare HECMs' and proprietary reverse mortgages' costs and benefits.
You Remain the Owner of Your Home
- You own your home, just like you did before you got a reverse mortgage.
- You still have to pay property taxes, homeowner’s insurance, and pay for any repairs.
- You will have to pay financing fees, similar to those you paid when you got your mortgage. You can use money from the reverse mortgage to pay those fees.
Repayment of the Reverse Mortgage
- When the loan period is over – that is, when you sell or move out of your home, or when you die, you or your heirs must repay all your cash advances.
- Reputable lenders don’t want your house; they want repayment – often from the sale of your home.
- Your estate can repay the reverse mortgage when you die with proceeds from the sale of your home or from any other source of funds.
Alternatives to Reverse Mortgages
- Sell your home and move to a smaller home or apartment.
- Investigate a home equity loan, if you believe you would qualify and be able to repay it. Unlike a reverse mortgage, lenders will consider whether you have sufficient income to repay it. With most home equity loans, if you miss your monthly repayments, you could risk losing your home.
- Visit your Area Agency on Aging office to see if you are eligible for any public assistance.
For More Information
AARP's web site has useful information about reverse mortgages as well as a loan calculator that will give you an idea of how much you can get in a reverse mortgage.