A reverse mortgage is a type of loan offered to homeowners ages 62 and older (60 in some states) that enables them to convert a portion of the primary residence’s equity into cash. Reverse mortgage loans apply compound interest, and require the borrower to carry home insurance and pay property taxes on time—but they don’t require repayment until the borrower dies or moves out of the home. Unlike a traditional mortgage, the balance of a reverse mortgage increases over time due to fees and interest, while equity decreases.
The market offers several kinds of reverse mortgages, and you can typically choose from a few distribution options, ranging from a lump-sum payment to monthly payments. Some types of reverse mortgages allow you to use the funds as you please, while others apply restrictions. Here’s what to consider as you look into where to get a reverse mortgage.
- In most states, lenders only offer reverse mortgages to people ages 62 and older.
- A reverse mortgage doesn't require monthly payments, but it must be paid back when the homeowner dies or moves out.
- Reverse mortgages incur fees and interest, and their balances increase over time.
- A reverse mortgage typically offers flexible distribution options, from a lump sum to monthly payments.
Types of Reverse Mortgage Lenders
The market offers three types of reverse mortgages, originated by different types of lenders.
Home Equity Conversion Mortgages (HECMs), which you can use for any purpose, are the only type of reverse mortgage federally insured by the U.S. Department of Housing and Urban Development (HUD). This type of loan is available through lenders approved by the Federal Housing Administration (FHA). It’s also the most common type of reverse mortgage.
Eligible properties can include one- to four-unit homes, single-family homes, HUD-approved condominiums, and FHA-approved manufactured homes. To qualify for an HECM, you must:
- Be 62 years old or older
- Live in the subject property as your primary residence
- Have a small mortgage or own your home outright
- Have no delinquent federal debt
HUD requires borrowers to attend in-person and telephone HECM counseling through affiliated organizations. Counseling agencies typically charge a fee of around $125. To find a counselor in your area, visit the HUD website or call (800) 569-4287.
While you might see advertisements from companies claiming to offer reverse mortgages backed by the U.S. Department of Veterans Affairs (VA), they’re not accurate—the VA does not insure these types of loans.
Single-Purpose Reverse Mortgage Lenders
Some local and state governments and nonprofit organizations offer single-purpose reverse mortgages. This form of reverse mortgage loan is the least expensive, but can only be used for a single purpose, specified by the lender. For instance, the lender may specify that the borrower can only use the funds to make home improvements or pay property taxes.
To qualify for this type of reverse mortgage, homeowners often need to earn less than a specified level of income.
Banks and Private Mortgage Lenders
Financial institutions and licensed lenders develop and offer proprietary reverse mortgages. Homeowners with high-value properties can often qualify for this sort of loan, and jumbo reverse mortgages fall into this category. Proprietary reverse mortgages are not available in all areas.
How To Choose the Best Reverse Mortgage for You
It’s worthwhile to seek financial counseling before obtaining any type of reverse mortgage. A qualified counselor can explain the difference between a home equity loan and a reverse mortgage, along with the details of how each type of loan works. They can also explain the costs, repayment requirements, and tax implications associated with each type of reverse mortgage.
HECM reverse mortgages typically offer three types of payouts:
- Lump sum: A lump-sum payout features a fixed interest rate and enables you to withdraw all funds at one time. However, this option offers the lowest level of funding, compared to other options, as well as the highest costs since you’ll be paying interest and fees on the full amount. Lump-sum payouts do not provide a line of credit and can pose more risk for younger borrowers.
- Line of credit: A line of credit features lower costs than the lump-sum option because you only pay fees and interest on the funds you use. This type of reverse mortgage features an adjustable interest rate and gives you the option to withdraw funds when you need them. Plus, you can combine a line of credit with monthly payments.
- Monthly payments: The monthly payment option features an adjustable interest rate and can be combined with a line of credit. You can choose to receive fixed payments for a specified term or tenured payments, which provide payouts for the life of the reverse mortgage, as long as the payouts don’t exceed the amount of the mortgage.
Choosing the right type of reverse mortgage—and where to get it—can depend on the amount of money you need and how you want to spend it.
Home Equity Conversion Mortgages
HECMs provide the most flexibility because you can use the funds for any purpose, and they’re offered through FHA-approved lenders. The amount of money you can borrow depends on the ages of an eligible non-borrowing spouse or youngest borrower. Lenders also base loan amounts on current interest rates, FHA HECM mortgage limits, and the appraised value or sales price of your home.
Let’s say you’re nearing the end of your mortgage and your spouse has fallen ill and requires long-term rehabilitation or in-home nursing care. An HECM could provide monthly payments you can use to pay for those services and provide a line of credit for additional expenses that might arise.
Single-Purpose Reverse Mortgages
Single-purpose reverse mortgages can provide funds for homeowners who earn less than certain income thresholds, but may exclude higher-income owners. While these reverse mortgages offer the lowest costs, they’re not available everywhere.
If you have a leaky roof, but don’t have the money to replace it, a single-purpose reverse mortgage might provide the funds you need. But since the lender may restrict the funds to certain uses, you may not be able to use them to pay for non-home-related expenses.
Proprietary Reverse Mortgages
Although they’re not offered everywhere, a proprietary reverse mortgage can provide substantial funding if you own a high-value home and have a small mortgage. In some states, you can qualify for a proprietary reverse mortgage at age 60. Some lenders only offer lump-sum payments for proprietary reverse mortgages.
If you want to buy a second home but don’t want to drain your savings, a proprietary reverse mortgage might be a useful tool. But to qualify for a reverse mortgage, the home on which you obtain the loan must remain your primary residence.
Since the 2007 foreclosure crisis, proprietary reverse mortgages have become less common.
How To Get a Reverse Mortgage
If you think an HECM will fit your needs, you can use HUD’s lender lookup tool to find a reverse mortgage lender in your area. When you find a lender, you must submit a Residential Loan Application for Reverse Mortgages. The application requires you to provide:
- Property information, including your home’s address, appraised value, year built, and residence type.
- Borrower information, including details about your assets and income, your contact information, marital status, and Social Security number.
- Information about any liens against the property.
- Supporting documents such as appraisals, bank statements, and portfolio statements.
The loan process varies by lender. While many lenders offering traditional mortgages provide online application forms, reverse mortgage lenders usually don’t. Typically, you must fill out a short online eligibility form or call a toll-free number to speak with a loan officer. If you qualify, the loan officer will send you an application package for you to complete and return.
A federal law known as the three-day cancellation rule enables you to cancel a reverse mortgage within three business days of closing, without financial penalties. To cancel, send a letter to the lender via certified mail with a return receipt.
The Bottom Line
A reverse mortgage can give you the money you need to cover unexpected expenses such as medical costs and home repairs. However, this type of loan is not for every homeowner. Obtaining a reverse mortgage can lead to unintended consequences, such as foreclosure if you fail to pay property taxes, so seek professional advice before you proceed.
Before you start considering where to get a reverse mortgage, ask yourself a few questions:
- Do you want to keep living in your home?
- Are there reverse mortgage alternatives, such as a home equity loan or downsizing to a smaller dwelling?
- Do you have health issues that may require you to move out of the home?
- Will your heirs want to keep the home after you’re gone?
- If you need extra income, will a reverse mortgage provide enough money for you to remain in your home?
If you choose to go ahead with a reverse mortgage, turn to trusted local, state, and federal resources to find a reputable lender.
Frequently Asked Questions (FAQs)
How do reverse mortgage companies make money?
Reverse mortgage lenders charge closing costs and other fees. For HECMs, some lenders also charge you for insurance premiums. Plus, reverse mortgages charge interest, which accumulates throughout the life of the loan.
How do you deal with difficult reverse mortgage companies?
Unscrupulous players sometimes prey on unwitting homeowners. A contractor may offer a reverse mortgage loan to pay for home repairs, or a company may claim to offer VA reverse mortgage loans, which don’t exist.
If you have trouble with a loan officer or loan service, file a complaint with the company. And if you suspect a lender is perpetrating fraudulent behavior, contact the Federal Trade Commission, your state’s attorney general’s office, and your state’s banking authority.
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