A reverse mortgage is a popular option for homeowners age 62 or older who wish to draw equity from their home to supplement their income without making mortgage payments. Reverse mortgages sponsored by the U.S. Department of Housing and Urban Development (HUD), known as Home Equity Conversion Mortgages, can be used for any purpose.
Reverse mortgages are also offered by some state and local governments as well as nonprofit agencies. These are called single-purpose reverse mortgages and are earmarked for home repairs, improvements, or tax payments. A proprietary reverse mortgage loan from a private lender can be used for a larger loan advance based on the value of the home.
Learn how a reverse mortgage works, understand the pros and cons, and find out about alternative mortgage options.
How Reverse Mortgages Work
A reverse mortgage is a mortgage specifically designed for senior citizens who are 62 years of age or older. “This type of mortgage allows a homeowner to tap the equity in their home and not have to make any monthly payments, and there are no credit score or income requirements” Melissa Cohn, executive mortgage banker at William Raveis Mortgage, told The Balance by email. “They can receive a lump-sum payment, a fixed monthly payment, or even a line of credit.”
While monthly payments are not required with a reverse mortgage, once you leave your home, you’ll need to pay off the mortgage or the lender will be able to take ownership of it. “Leave your home” can take various forms, which include moving into a nursing home or assisted living facility, choosing to live with family members, or passing away.
If the surviving spouse or family member is a co-borrower, that individual can continue to live in the home. When they leave, the same rule applies: The lender takes ownership of the home unless the mortgage is paid. If the spouse is not a co-borrower, this person may still qualify under HUD rules to stay in the home.
You must have substantial equity in your home to qualify for a reverse mortgage.
Pros and Cons of Reverse Mortgages
No monthly payments
No credit score or income requirements
A qualifying surviving spouse can remain in the home
The upfront costs associated with a reverse mortgage can be high
Amount owed to the lender increases instead of decreases
The loan must be paid back if you move out or pass away
The equity in the home will diminish, resulting in fewer assets for you and your heirs
- No monthly payment: For older adults on a fixed income, supplementing their income without a monthly payment can help make ends meet.
- No credit score or income requirements: The home’s equity is the qualifying financial factor in determining a reverse mortgage loan.
- A qualifying surviving spouse can remain in the home: With a HUD home equity conversion mortgage (HECM) loan, surviving “Non-Borrower Spouses” can remain in the home provided certain conditions are met, including the home is the principal residence; the surviving spouse can obtain the title; and the loan is not in default for any reason.
- The upfront costs associated with a reverse mortgage can be high: These include an origination fee and other closing costs, which are often paid using money from the loan.
- Amount owed to the lender increases instead of decreases: For the average homeowner, the goal is to pay off their mortgage and own the house. The reverse happens with this type of mortgage since interest and fees are added to the loan balance each month.
- The loan must be paid back if you move out or pass away: While the goal may be to stay in the house until you die, if you move to an assisted-living or nursing facility or in with family, the loan will need to be repaid; otherwise, the lender will take possession.
- The equity in the home will diminish, resulting in fewer assets for you and your heirs: As your loan balance increases, your equity in the home decreases. To repay the loan, the homeowners or heirs typically need to sell the home. This is something that needs to be clearly explained in family estate-planning conversations.
Reverse Mortgage Alternatives
There are alternatives to reverse mortgages that may be worth exploring.
Refinancing Your Home
Refinancing your mortgage typically results in a lower interest rate and a decreased monthly payment that could potentially save you hundreds of dollars each month. Your credit score and income will be considerations if you refinance your mortgage.
Taking Out a Home Equity Loan or HELOC
A home equity loan or a home equity loan of credit (HELOC) are additional ways to tap into your home’s equity regardless of your age. A home equity loan has fixed payments, whereas a HELOC is a revolving line of credit, like a credit card. Both can be used to finance home renovation projects or provide money to live on or pay bills. Also, each will take into consideration your credit score and ability to manage existing debt.
Lowering Your Expenses
There are a number of local and state programs designed to assist senior citizens with the cost of living, including the deferment of property taxes and decreasing heating costs and other bills.
Selling Your Home
It may be feasible to sell your home, especially if it’s larger, as a smaller one can be less expensive to pay for and maintain. Depending on the equity in your home, purchasing a smaller one with a more affordable mortgage can free up thousands of dollars to use for other purposes. Selling your home isn’t dependent on your credit score or income.
Frequently Asked Questions (FAQs)
How do I pay back a reverse mortgage?
You don’t make monthly payments on a reverse mortgage. However, after you move out of the home, the total balance is due. If you (or your heirs) can’t pay off the total amount of the loan, the lender will assume ownership of the home.
How much can I get from a reverse mortgage?
The amount you can get from a reverse mortgage will depend on how much equity is in your home. The more equity you have, the more money you can get.
What is the interest rate on a reverse mortgage?
Interest rates vary, but your lender would be able to provide this information. Adjustable interest rate loans are more common with reverse mortgages than fixed rate loans. With HECM adjustable rate loans, interest rate changes are subject to annual and lifetime caps.
How do I qualify for a reverse mortgage?
Homeowners must be at least 62 years of age and own the home or have paid down the mortgage balance considerably. They must also set aside funds or plan to use a portion of the loan disbursement for ongoing property and maintenance costs, taxes, insurance, and repairs.