Reverse Mortgages
If you’re an older homeowner who’s looking for a way to stay in your home and create funds for your retirement, consider a reverse mortgage. It offers a way for you to use home equity as a financial resource, creating greater flexibility for retirement funding.
Interest in reverse mortgages has been fueled by increases in home equity, due largely to rising home values, and the desire of older people to stay in their homes as long as possible (age in place).
What is a reverse mortgage?
First, what is home equity? It’s the difference between what you owe on your home (mortgage) and what your home is worth. A reverse mortgage is one way older homeowners can turn that equity into cash.
A reverse mortgage allows homeowners age 62 or older (55+ for some proprietary reverse mortgages) to borrow against the equity in their home, and receive the funds as a lump sum, fixed monthly payment, or line of credit. The loan doesn’t have to be repaid until the borrower sells the home, moves out, or passes away.
How does a reverse mortgage work?
With a traditional mortgage, you borrow money to buy or refinance a home and make monthly principal and interest payments to the lender until you pay off the loan. With a reverse mortgage, you borrow money based on your home equity (and other factors) and receive the funds directly, but you don’t have to make monthly payments to the lender. It’s important to know that you still have to pay your property taxes, homeowners insurance, HOA dues (if applicable), and maintain your home properly.
Reverse Mortgages Guidebook
Types of reverse mortgages
There’s more than one kind of reverse mortgage. Here’s an overview of the main types.
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Home Equity Conversion Mortgages (HECM)
The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD). HECMs offer several disbursement options, including lump sum, line of credit, and monthly payments. They are widely accessible as they do not have income or medical requirements, but borrowers must be at least 62 years old, have significant home equity, and live in the home as their primary residence.
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Proprietary reverse mortgages
Proprietary reverse mortgages are private loans backed by the companies that develop them. They are not federally insured and typically cater to homeowners with higher property values. Since these loans can provide larger loan amounts than HECMs, they can be a suitable option for homes that exceed the FHA lending limits. They are more flexible than the federally insured HECM program but may come with higher risks and costs. They allow a broader range of homeowners to access reverse mortgages.
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Jumbo reverse mortgages
Jumbo everse mortgages, also known as proprietary reverse mortgages, are designed for high-value homes that exceed the federal limits set for HECMs. These loans offer larger loan amounts, making them suitable for homeowners with properties worth more than the HECM limit. Jumbo reverse mortgages are not FHA-insured and usually come with higher interest rates.
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Refinance reverse mortgages
Refinance reverse mortgages allow homeowners who already have a reverse mortgage to refinance into a new one. This may be a good option if the home’s value has increased significantly, or if interest rates are lower than the current loan. Refinancing can provide additional funds or more favorable terms, but as with any loan, it’s important to weigh the costs and benefits carefully.
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Purchase reverse mortgages
A reverse mortgage for purchase, also known as a HECM for Purchase or H4P, allows older buyers to use a reverse mortgage to buy a new primary residence. This type of loan combines a home purchase with a reverse mortgage in one transaction, which can be a convenient way for older homeowners to relocate or downsize while accessing the equity from their new home without monthly mortgage payments.
What properties are eligible for reverse mortgages?
You may be surprised to know that reverse mortgages are not just for single family homes. Because there are specific guidelines for different types of property, it’s important to work with an experienced reverse mortgage loan originator, but these properties are generally eligible for reverse mortgages:
- Single family
- 2-4 unit
- HUD-approved condominiums
- Manufactured homes
- Townhouses
- FHA-approved planned unit developments (PUDs)
- Mixed-use properties
- Co-ops in certain areas
Reverse mortgage pros and cons
There are plusses and minuses to any mortgage, but reverse mortgages in particular have raised questions over the years.
Pros
- Borrowers can access funds without selling their home
- Monthly mortgage payments are optional
- Funds can be received as a line of credit, lump sum, monthly payment, or combination
- Borrowers can use funds as they wish, including to supplement their retirement income
- Borrowers can use the funds to defer Social Security and pension payments
- The loan doesn’t have to be repaid until the borrower sells the home, moves out, or passes away
- Even if the loan balance is greater than the home’s value, the lender must accept the proceeds of the home sale as full payment of the loan
Cons
- Closing costs can be higher than a traditional mortgage (particularly HECMs)
- HECMs require an upfront mortgage insurance premium and monthly mortgage insurance (can be included in the loan)
- Most reverse mortgages have variable interest rates that may rise, but they also have interest rate caps to limit the increases
- Interest accrues over the life of the loan, adding to the loan balance if the borrower decides not to make loan payments
- Borrowers must have funds to pay property taxes, homeowners insurance, HOA dues (if applicable), and maintain the home properly
Reverse mortgage requirements
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The primary borrower must be at least 62 years old (55 for certain proprietary products). The home must be the primary residence with sufficient equity, and the borrower must be able to pay ongoing expenses such as property taxes, homeowners insurance, HOA dues (if applicable), and maintenance.
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Reverse mortgages allow homeowners to convert part of their home equity into cash. The amount available depends on the borrower’s age, the home’s value, and current interest rates. Unlike traditional mortgages, borrowers do not need to repay the loan until they sell the home, move out, or pass away.
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Repayment is deferred until the borrower no longer occupies the home as their primary residence. The loan is most often repaid through the sale of the property. Any remaining equity after paying off the reverse mortgage belongs to the borrower or their heirs.
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Reverse mortgages typically have variable interest rates, which can change over the life of the loan. They also include charges, such as origination fees, closing costs, and mortgage insurance premiums, which can be financed with the loan proceeds.
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Lenders conduct a financial assessment to ensure the borrower can afford to maintain their home and pay property taxes, homeowners insurance, and HOA dues (if applicable). This assessment helps protect both the lender and the borrower from the risk of default and foreclosure.
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Regulations provide protections for non-borrowing spouses, allowing them to remain in the home under certain conditions even after the borrowing spouse passes away.
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Borrowers can choose how to receive the funds from a reverse mortgage: A lump sum, fixed monthly payments, line of credit, or combination of these options.
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A reverse mortgage can have an impact on the inheritance left to the borrower’s heirs, as the loan must be repaid, usually by selling the home. However, heirs will not owe more than the home’s value at the time of repayment, even if it’s lower than the loan balance.
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HUD requires all potential borrowers to undergo counseling with a HUD-approved counselor. This session provides an overview of reverse mortgages, other financial alternatives, and assists in the decision-making process. Counseling should be performed for the specific reverse mortgage you and your loan originator have determined to be best for you.
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The money received from a reverse mortgage is typically tax-free, as it is considered loan proceeds and not income. However, CrossCountry Mortgage does not provide tax advice and borrowers should always consult a tax advisor for further information.
