Reverse Mortgages

What is a reverse mortgage?

A reverse mortgage is a way for seniors to tap into the equity in their homes to produce an income stream. Unlike a conventional mortgage, where you pay every month to the lender, in a reverse mortgage the lender pays you a monthly amount for the rest of your life.

How does a reverse mortgage work?

A reverse mortgage is still a loan. The loan is simply paid to you in monthly amounts. But it only has to be repaid upon the death of the borrower, or if you sell your home. Most reverse mortgage arrangements require the borrower to be at least 62 years of age, and the home must remain your primary residence (where you live for the majority of the year) while the loan is in effect.

Because a reverse mortgage is a loan, the payments you receive are not taxable. The amount you receive depends on the equity in your home and its present and expected future value, as well as your age and life expectancy. You can choose to use all or part of the equity in the home for the reverse mortgage; for example you can take out the loan for half of the equity in your home, which will reduce the amount of your payments.

If the value of your home decreases or does not change as the lender expected, this will not affect the amount of your payments. The lender will absorb any losses due to a decline in your home’s value.

With a reverse mortgage you still remain the owner of the home, and are responsible for property taxes, insurance, and maintenance. Like a conventional mortgage, with a reverse mortgage you might have to pay an application fee, origination fee, closing costs, and monthly servicing fees.

What are the types of reverse mortgages?

There are three main types of reverse mortgages. Single-purpose reverse mortgages are offered by some state and local government agencies and nonprofit organizations. The least expensive option, they are intended for low- to moderate-income borrowers. The loan specifies what the payments can be used for, such as home repairs or upgrades, or property taxes.

Federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs), are backed by the federal government. These offer more flexibility, because there is no restriction on how the payments can be used. But they have higher upfront costs, and are often more expensive than other home loans.

The highest upfront costs typically come with Proprietary Reverse Mortgages. These are like HECMs but are offered by private lending companies and are not guaranteed by the federal government.

What should I know before getting a reverse mortgage?

Although reverse mortgages are suitable for many people, you have to exercise caution as the terms can be confusing. For one thing, many reverse mortgages don’t allow the surviving spouse or heirs to be added to the loan. Therefore when the borrower dies, the surviving spouse might have to sell the home to repay the loan.

The surviving spouse, family members, and others living in the home must understand what the terms are and make arrangements if the borrower passes away. Before entering into a reverse mortgage, you should consider consulting with a qualified financial or legal advisor. Many HECMs and Private Reverse Mortgages require you to consult with a counselor, who can advise you on the fees and implications of a reverse mortgage and possible alternatives such as a conventional home loan.

For additional information

For more information about reverse mortgages, these sites might be helpful

Federal Trade Commission’s reverse mortgage page

The Reverse Mortgage Site

You might also watch these videos for more information: