Dock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Dock David Treece ContributorDock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Written By Dock David Treece ContributorDock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Dock David Treece ContributorDock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Contributor Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
| Loans & Mortgages Editor
Updated: Jun 24, 2024, 6:55pm
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A reverse mortgage is a type of loan that is used by homeowners at least 62 years old who have considerable equity in their homes. By borrowing against their equity, seniors get access to cash to pay for cost-of-living expenses late in life, often after they’ve run out of other savings or sources of income. Using a reverse mortgage, homeowners can get the cash they need at rates comparable to home equity loans and home equity lines of credit (HELOCs).
FEATURED PARTNER OFFERWhat is a Reverse Mortgage
A reverse mortgage is a secure financial tool which allows property owners 62 years and older to borrow against their home equity
Lump sum, monthly payments, a line of credit or a combination of the three
On Mutual of Omaha's WebsiteA reverse mortgage is a secure financial tool which allows property owners 62 years and older to borrow against their home equity
Lump sum, monthly payments, a line of credit or a combination of the three
Think of a reverse mortgage as a conventional mortgage where the roles are switched.
Most reverse mortgage loans are not repaid by the borrower. Instead, when the borrower moves or dies, the borrower’s heirs sell the property to pay off the loan. The borrower (or their estate) gets any excess proceeds from the sale.
Most reverse mortgages are issued through government-insured programs that have strict rules and lending standards. There are also private, or proprietary, reverse mortgages, which are issued by private non-bank lenders, but those are less regulated and have an increased likelihood of being scams.
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The process of using a reverse mortgage is fairly simple: It starts with a borrower who already owns a house. The borrower either has considerable equity in their home (usually at least 50% of the property’s value) or has paid it off completely. The borrower decides they need the liquidity that comes with removing equity from their home, so they work with a reverse mortgage counselor to find a reverse mortgage lender and suitable program.
Once the borrower picks a specific loan program, they apply for the loan. The lender does a credit check, reviews the borrower’s property, its title and appraised value. If approved, the lender funds the loan, with proceeds structured as either a lump sum, a line of credit or periodic annuity payments (monthly, quarterly or annually, for example), depending on what the borrower chooses.
After a lender funds a reverse mortgage, borrowers use the money as provided for in their loan agreement. Some loans have restrictions on how the funds can be used (such as for improvements or renovations), while others are unrestricted. These loans last until the borrower dies or moves, at which time they (or their heirs) can repay the loan, or the property can be sold to repay the lender. The borrower gets any money that remains after the loan is repaid.
In order to qualify for a government-sponsored reverse mortgage, the youngest owner of a home being mortgaged must be at least 62 years old. Borrowers can only borrow against their primary residence and must also either own their property outright or have substantial equity—usually at least 50%—with, at most, one primary lien; in other words, borrowers can’t have a second lien from something like a HELOC or a second mortgage. If the borrower doesn’t own their house outright, they usually have to pay off their existing mortgage with the funds received from a reverse mortgage.
Typically only certain types of properties qualify for government-backed reverse mortgages. Eligible properties include:
In the case of government-sponsored reverse mortgages, borrowers also are required to sit through an information session with an approved reverse mortgage counselor. They also have to stay current on property taxes and homeowner’s insurance and keep their property in good condition.
Private reverse mortgages have their own qualification requirements that vary by lender and loan program.
If you get a proprietary reverse mortgage, there are no set limits on how much you can borrow. All limits and restrictions are set by individual lenders.
However, when using a government-backed reverse mortgage program, homeowners are prohibited from borrowing up to their home’s appraised value or the FHA maximum claim amount ($765,600). Instead, borrowers can only borrow a portion of their property’s value. Part of the property’s value is used to collateralize loan expenses, and lenders also typically insist on a buffer in case property values decline. Borrowing limits also adjust based on the borrower’s age and credit and also the loan’s interest rate.
There are two primary costs for government-backed reverse mortgages:
Mortgage insurance is meant to protect lenders in case of borrower default. While reverse mortgages can’t usually default in the same ways as conventional mortgages—when borrowers fail to make payments—they can still default when owners fail to pay property taxes or insurance or by failing to properly maintain their properties.
In addition to these costs, lenders also will charge their own origination fees. A lender can charge $2,500 or 2% of the first $200,000 of your home’s value (whichever value is greater) plus 1% of the amount over $200,000, according to the U.S. Department of Housing and Urban Development (HUD). Home equity conversion mortgages (HECMs) have origination fees capped at $6,000.
Lenders also typically charge other fees, including for property appraisals, servicing/administering loans and other closing costs, such as credit check fees.
However, all costs are typically rolled into the balance of the mortgage, so lenders don’t need to pay them out of pocket.
Most reverse mortgages are government-insured loans. Like other government loans, like USDA or FHA loans, these products have rules that conventional mortgages don’t have, because they’re government-insured. These include eligibility criteria, underwriting processes, funding options and, sometimes, restrictions on uses of funds. There are also private reverse mortgages, which do not have the same strict eligibility requirements or lending standards.
Single-purpose loans are typically the least expensive type of reverse mortgage. These loans are provided by nonprofits and state and local governments for particular purposes, which are dictated by the lender. Loans may be provided for things like repairs or improvements. However, loans are only available in certain areas.
Home equity conversion mortgages, or HECMs, are backed by HUD and can be more expensive than conventional mortgages. However, loan funds can be used for just about anything. Borrowers can choose to get their money in several different ways, including a lump sum, fixed monthly payments, a line of credit or a combination of regular payments and line of credit.
Proprietary reverse mortgages are private loans that aren’t backed by a government agency. Lenders set their own eligibility requirements, rates, fees, terms and underwriting process. While these loans can be the easiest to get and the fastest to fund, they’re also known to attract unscrupulous professionals who use reverse mortgages as an opportunity to scam unsuspecting seniors out of their property’s equity.
A reverse mortgage’s structure only makes it an appropriate product for certain borrowers. Rverse mortgages may make sense for:
While there are some cases where reverse mortgages can be helpful, there are lots of reasons to avoid them. A reverse mortgage isn’t a good option if:
Most people who take out reverse mortgages do not intend to ever repay them in full. In fact, if you think you may plan to repay your loan in full, then you may be better off avoiding reverse mortgages altogether.
However, generally speaking, reverse mortgages must be repaid when the borrower dies, moves, or sells their home. At that time, the borrowers (or their heirs) can either repay the loan and keep the property or sell the home and use the proceeds to repay the loan, with the sellers keeping any proceeds that remain after the loan is repaid.
You may need to repay a mortgage either with cash or by selling the home if:
Government-backed reverse mortgages are generally very safe. But many of the ads that consumers see are for reverse mortgages from private companies. When working with a private lender—or even a private company that claims to broker government loans—it’s important for borrowers to be careful.
Here are some things to pay attention to:
In many cases, these scams get unwitting homeowners to take out reverse mortgages and give the money to the scammer. In other cases, scams try to force homeowners to take out reverse mortgages at onerous interest rates or with hidden terms that can cause the borrower to lose their property.
Here are some common reverse mortgage scams to look out for, according to the Office of Inspector General for HUD:
Reverse mortgages aren’t for everyone. In many cases, prospective borrowers may not even qualify, for example, if they aren’t over 62 or don’t have considerable equity in their homes. If a reverse mortgage isn’t right for you, there are plenty of other routes you can go to get the funding you need. Alternatives include:
