What is a reverse mortgage?

What are reverse mortgages?

A reverse mortgage allows you to borrow money from the amount of equity you have in your home. Your home equity is the amount of your home that you own, minus the amount you owe on the mortgage.

For example, if you owe $20,000 on your mortgage and your home is worth $300,000, you have $280,000 of equity in your home.

Turn data into insights with Excel

Make better decisions backed by data and insights

Learn more

To get a reverse mortgage, you must be at least 62 years old. Typically, you need to have at least 50% equity in your home and live in the property for most of the year. Once you qualify for the mortgage, you’ll receive either monthly payments for the lender or one lump sum payment.

However, interest is added each month towards the balance that you owe the lender, meaning that you’ll owe even more money toward the mortgage over time and have less equity in your home. The reverse mortgage needs to be paid back when you move away or no longer live in your home for most of the year. Your family may also be responsible for paying back the reverse mortgage if you pass away without paying it off.

Types of reverse mortgages

There are three types of reverse mortgages: Home Equity Conversion Mortgages (HECMs), single-purpose reverse mortgages, and proprietary reverse mortgages.

• HECMs are the most common type of reverse mortgage. HECMs can be used for any purpose. They’re federally insured by Housing and Urban Development (HUD), but this insurance protects the lender if they don’t get their money back, not the homeowner.
• Single-purpose reverse mortgages are the least expensive option. However, the recipient of this type of reverse mortgage can only use the loan money under the lender’s guidelines—for example, you might only be able to use the money towards your property taxes.
• Proprietary reverse mortgages, also known as private reverse mortgages, are available through private lenders and can be taken out by homeowners that are at least 55. These mortgages aren’t federally insured and may come with higher interest rates.

Why get a reverse mortgage?

Reverse mortgages can help people supplement their retirement fund without having to sell their home. This is a helpful way for those who are 62 and older pay their bills and other living expenses: after all, once you retire, you often lose a significant amount of income. Additionally, the money that you get from your reverse mortgage is tax free. Another bonus is that you don’t have to make monthly payments towards the reverse mortgage.

What is the downside to a reverse mortgage?

The biggest downside of getting a reverse mortgage is that you’ll lose equity in your home. Since you don’t make payments towards your reverse mortgage until you die or move, you’ll make less money once you sell your home. This can also reduce your beneficiaries’ inheritance. If your heirs can’t pay back the loan if you move or pass away, then they’ll lose the home.

The reverse mortgage process

If you’re interested in getting a reverse mortgage, here’s what the process looks like:

• Do your research. Make sure you investigate all your options and choose the one that is right for your financial situation.
• Apply for the reverse mortgage. You’ll need to fill out an application so that the lender can gauge your eligibility.
• Go through HECM (Home Equity Conversion Mortgage) counseling. Taking out a reverse mortgage is a big decision. Borrowers legally must go through HECM counseling so that they understand the terms of the reverse mortgage. Counseling sessions last about an hour but can take longer.
• Get your home appraised. The lender needs to consider the value of your home to determine how much money they will loan you.
• Underwriting. In this step, the lender makes sure you actually own the property. They also double-check that all the loan requirements have been met.
• Notary and closing. A notary will meet with you to sign the closing documents. Once those documents have been signed, there is a three-day period where the borrower can cancel the application with no penalty. Once this period is over, the borrower will receive the reverse mortgage money.

There are many ways you can use your home to access extra cash. Up next, explore other budgeting and financial tips, such as considering an adjustable-rate mortgage and how you can use your home as a line of credit.