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What is a Reverse Mortgage?

Reverse Mortgage Advice

Reverse mortgages can help seniors 62 or older to live more comfortably in retirement. You can use a reverse mortgage to pay for home improvements, medical expenses, travel, or anything else you can think of. The best part is that there are no monthly payments, so it’s a low-risk way to access the equity in your home. But costs can be high, and rules can be complicated. So, it’s important to understand what a reverse mortgage is before you decide to move forward. This guide can help.

If you’re looking to take advantage of the equity in your home using a reverse mortgage, we can help you understand how it works and what you can expect moving forward. Call Consolidated Credit today at 1-800-435-2261 to speak with a HUD-certified housing counselor for free with no obligation.

Reverse mortgage facts

A reverse mortgage is a loan made for adults age 62 and older who own their home and use it as their primary residence. It allows borrowers to use the equity in the home. Equity is the difference between what is owed on the house and its current value.

You can’t think of a reverse mortgage as just any mortgage. In fact, in many ways, it functions in the exact opposite way of the regular mortgage you have on your home.

“When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays YOU.”

Federal Trade Commission

It’s important to understand that:

  • Reverse mortgages offer seniors a way to add tax-free income during retirement.
  • Potential applicants should take a counseling session before applying, and for some types of reverse mortgages, it’s required.
  • Although there are no monthly payments, homeowners must have the means to cover taxes, insurance, and maintenance on the property.
  • All owners of the property must be on the loan and all of them must be over age 62

Reverse mortgage requirements

Requirements for the homeowner

  • All owners of the home must apply for the reverse mortgage and sign the loan papers.
  • All borrowers must be at least 62 years of age.
  • Owners must occupy the home as their primary residence, meaning they must live there.

Requirements for the home

  • Single-family one-unit dwellings are eligible.
  • Some programs may also accept 2-4 unit owner-occupied dwellings, along with some condominiums, cooperatives, planned unit developments and manufactured homes.
  • Mobile homes are generally not eligible.

Types of reverse mortgages

  1. Home equity conversion mortgages (HECMs) – These are government-backed reverse mortgages that can be used for any purpose. They are secured by HUD (U.S. Department of Housing and Urban Development)
  2. Single-purpose reverse mortgages – These are issued by local or state governments, these loans are cheaper but can only be used for specific reasons. Your income may also need to be below a certain level to qualify.
  3. Non-government loans – Private mortgage companies issue these loans. It’s possible you can receive larger payouts than with HECMs. The requirements for these may also be different, since they are set by the lender.

Reverse mortgage pros and cons

Advantages

  • Flexibility – You can choose how you receive the funds. You can take a lump-sum, get monthly disbursements, or have an open line of credit. In some cases, you can even mix and match these options.
  • No monthly payments – Other home equity borrowing options require you to make payments. This one doesn’t.
  • It won’t affect Social Security or Medicare – Generally, you will not lose your government assistance benefits by getting a reverse mortgage.
  • No need to move – You don’t need to sell your home to access some of the money locked in equity.
  • No taxes on the income – Payouts from the loan aren’t taxed.
  • Helps those on limited incomes – Those who are “house-rich” but cash-poor can better manage their money.
  • No need to worry about the balance – An insurance policy protects you if the loan balance is higher than your home’s value.

Disadvantages

  • There’s still a foreclosure risk –While you don’t have to make mortgage payments, you still have to keep up with the taxes, insurance, and maintenance on the home. Otherwise, it could get foreclosed.
  • They can be costly – Between the interest rate, origination fees, mortgage insurance, appraisal fees, title insurance fees, and other closing costs, the total cost of your reverse mortgage could be as high as $40,000.
  • It will affect your inheritors – If your heirs wish to keep the home, they will be required to repay the loan to do so.
  • No room for roommates – The loan becomes due when the borrower(s) dies. A qualifying spouse can stay in the residence. Still, if there is no other qualified person, other people who might reside in the house would have to leave, even if they are related to the original borrower, because the house will get sold.
  • No stays in long-term care – The loan becomes due when you leave the home. For some, that means if you are in an extended care facility for more than a year, your house could be sold.
  • Funds must be used immediately to avoid affecting some government benefits – While Social Security and Medicare benefits aren’t affected by reverse mortgages, Medicaid and Supplemental Security Income (SSI) can. You must use the funds immediately when you receive them, or they could be considered an asset and impact your eligibility.

How does a reverse mortgage work?

The way a reverse mortgage works is simple. Borrowers can get a line of credit, receive monthly disbursements, or even get a lump-sum payment based upon the equity available in their house.

No payments are due until the owners of the home die or leave the residence. Once that happens, the proceeds from the sale of the home are used to pay off the loan.

Learn more about how a reverse mortgage works »

How much money do you get from a reverse mortgage?

The amount of money you can get depends on various factors, including the appraised value and equity in the home, the interest rate, and the youngest borrower’s age. The age of a non-borrowing spouse is taken into account as well.

Call 1-800-435-2261 or complete the form to talk to a HUD-certified housing counselor.