What Is a Reverse Mortgage?
A Reverse Mortgage is a loan that enables older homeowners to convert a portion of their home equity into cash. It may also provide a way for those with limited income to better manage their retirement finances by allowing them to use accumulated equity to cover living expenses.
As long as you live in the home, you’re not required to make monthly mortgage payments.* Instead, the lender makes monthly payments to you. That’s why it’s known as a reverse loan because with a traditional mortgage it’s the other way around, the borrower pays the lender. In this case, the borrower is not required to pay back the reverse loan until the home is sold, vacated, or the owner passes away; and the homeowner still retains ownership of the home. However, you must remain current on property taxes, hazard insurance, homeowner’s association dues, any other applicable fees, and you must be able to maintain the property.
Reverse Mortgage Benefits
- No FICO qualification
- No debt-to-income ratios - though borrowers must demonstrate a willingness and capacity to pay basic obligations
- Provides greater freedom in retirement - you aren’t restricted on how you can use the loan proceeds and it is non-taxable income
- Non-recourse loan
- No debt is assigned to your heirs when the loan becomes due. Instead, the family is given a period of time to pay off the loan or sell the home. In addition, family members/heirs are given the opportunity to buy the property for 95% of the appraised value, even if the house is worth less than the amount owed
- A reverse purchase can help a borrower retain their savings, improve their monthly cash flow, and / or finance a purchase that would normally be beyond their budget
- It can help seniors relocate to a different region or to move closer to family
- It can also help seniors move into a more affordable home that requires less maintenance, or better serves their physical needs by providing features like handrails, wider doors, or a single-story layout
- Helps borrowers age in place
Reverse Mortgage Requirements
- Borrowers must be 62 years of age or older
- Borrowers must qualify to pay taxes, insurance, or HOA if applicable
- You can own your home outright, or have a low balance on your mortgage that can be paid off at closing with proceeds from the reverse loan
- The borrower also must have financial resources to pay ongoing property fees
- Before obtaining this type of loan, all borrowers and non-borrowing spouses must receive independent counseling
Reverse Mortgage Loan Options
This type of loan is insured by the Federal Housing Administration (FHA). It is part of the Home Equity Conversion Mortgage (HECM) program. There are several types of Reverse Mortgages:
Payment of loan proceeds – The borrower receives the loan money as a line of credit, monthly installments, a combination of both, as a lump sum, or the payment retires an existing mortgage.
Interest Rate – The borrower chooses between a fixed interest rate and an adjustable interest rate. A fixed interest rate is only available with the lump sum payment option.
Purchase – It allows the borrower to purchase a principal residence. It requires less upfront investment than an all-cash purchase.
Refinance – It allows a borrower to convert one HECM loan into another HECM loan, which is usually done to lock in a lower interest rate or to borrow more cash if the home has increased in value.
*Borrower must pay required taxes, insurance, or HOA if applicable.