Introduction to Reverse Mortgages

Welcome to our guide on reverse mortgages!  In this article, we will explain reverse mortgages in simple terms.  Whether you are a homeowner thinking about your financial future, a family member helping someone understand their choices, or just curious about how reverse mortgages work, this guide is for you.

We cover the basics – from who can get a reverse mortgage to how repayment works – to help you decide if a reverse mortgage is right for you.

ARLO™ explains how a reverse mortgage works

What is a Reverse Mortgage?

Reverse mortgages allow you to tap into your home’s equity without monthly payments.  Much like a home equity loan or HELOC, this type of loan uses your home as collateral.  However, uniquely, repayment is deferred until the homeowner sells the house, permanently relocates, or passes away.  It’s a secure, government-insured loan designed specifically for homeowners aged 62 and older, offering a flexible financial solution without sacrificing your home ownership.

Reverse Mortgage vs. Traditional Loans

A reverse mortgage differs from traditional loans because it works in the opposite way.  With a traditional loan, you make monthly payments to reduce the amount you owe, increasing your property equity over time.

In contrast, a reverse mortgage doesn’t require regular payments.  Instead, as you receive money and interest accrues, the loan balance grows, and your equity in the property decreases. 

With a reverse mortgage, there are no monthly payments or prepayment penalties.  Depending on your financial goals, you can choose to repay some or all of the interest or any amount you want.

Reverse Mortgage vs. Other Mortgage Types

FeatureReverse MortgageTraditional MortgageHELOCShared Appreciation
Eligibility Age62+18+18+18+
Monthly PaymentsOptional RequiredRequiredOptional
Loan PurposeAccess home equityHome purchase or refinanceAccess home equityAccess home equity, investment
Interest RatesFixed or variableFixed or variableVariableN/A
Loan RepaymentUpon moving out, sale, or deathOver loan term (e.g., 30 years)After draw period (typically 10 years)Upon sale or end of term
Equity DepletionOptionalNo, builds equity over timeYesYes, at sale or term end
Credit LineYesNoYesNo
This table provides a comparative overview of four mortgage types: Reverse Mortgage, Traditional Mortgage, Home Equity Line of Credit (HELOC), and Shared Appreciation. It highlights key features and differences among them. (Updated 2/15/2024)

How Much You Can Get From a Reverse Mortgage

The amount of money you can get from a reverse mortgage usually ranges from 40% to 60% of your home’s appraised value.  The older you are, the more you can receive because loan amounts are based on your age and current interest rates.

Several factors determine the loan amount:

  • The age of the youngest borrower
  • The value of the home or the 2024 lending limit (whichever is less)
  • The current interest rates

Other factors that affect the loan amount include:

  • Costs to obtain the loan (these are subtracted from the available loan amount)
  • Existing mortgages and liens (these must be paid off)

Any remaining money after these deductions belongs to you.

You can use our easy-to-use calculator to find out how much you can receive from a reverse mortgage.

How Age Affects Your Principal Limit

You must be at least 62 years old to get a HECM reverse mortgage.  The Principal Limit, or the maximum amount you can borrow, is based on the age of the youngest borrower.  This is because the program uses life expectancy to estimate how long borrowers will be accruing interest.

If there are multiple borrowers, the loan amount is based on the youngest person’s age.  This is because all borrowers can live in the home for the rest of their lives without making payments.

Generally, younger borrowers can accrue more interest over their lifetime than older borrowers.  Therefore, an 82-year-old borrower would start with a higher Principal Limit than a 62-year-old borrower with the same terms. 

However, there are exceptions, but this is the general principle.

Exploring Reverse Mortgage Payment Options

There are several ways you can receive funds from a reverse mortgage:

  • Cash Lump Sum at Closing: Receive all the money at once.
  • Line of Credit: Draw money as you need it.
  • Term Payment: Receive a set amount of money for a specific period.
  • Tenure Payment: Receive guaranteed payments for as long as you live in your home.

You can also customize these options to fit your needs by combining them.  For example, a married couple in California, born in 1951 and owning a $500,000 home, might choose a reverse mortgage with the following plan:

  • Receive $100,000 at closing to improve their property and fund their grandchild’s college plan.
  • Set up a monthly payment of $1,000 for four years until they begin receiving a larger social security benefit.

This plan leaves them with an additional $125,000 available in a line of credit, which grows at a guaranteed rate if unused.

line of credit growth chart

How the Line of Credit Growth Rate Works 

In the past, many viewed reverse mortgages as a last resort.  However, let’s consider a savvy borrower planning for future needs.  She has enough income for now but is worried about needing more money later.

After covering loan costs, she gets a reverse mortgage with a $200,000 line of credit.  The unused portion of this line of credit grows at the same rate as the interest and mortgage insurance premiums that would have accrued if she had borrowed the money.

As time passes, her credit line increases.  This means that if she needs more funds in the future, they will be available to her.

If interest rates remain the same, her available credit would look like this:

  • 10 years: $350,000
  • 15 years: $500,000
  • 20 years: $660,000

If interest rates increase by 1% in the third year and another 1% in the seventh year, her available credit after 20 years would be more than $820,000.

It’s important to remember that this is not income; it’s a loan.  If you borrow the money, you owe it, and it will accrue interest.  You or your heirs must repay it when the property is sold. 

However, having between $660,000 and $820,000 available in 20 years is a significant financial resource.

Lump Sum Payouts: Fixed Rate Draw Requirements

With a fixed-rate reverse mortgage, you must take the total amount of money available at the loan’s closing.  You cannot leave any funds for future draws because no future draws are allowed with a fixed rate.

Due to higher tax and insurance default rates, HUD changed the rules when borrowers took 100% of the funds upfront.  Now, borrowers do not have access to 100% of the Principal Limit at the close of the loan. 

This change helps prevent financial difficulties by ensuring that borrowers have funds available over time rather than all at once.

ARLO shopping around for the best interest rates and closing costs.

#1 Tip: Finding the Best Interest Rates and Closing Costs

To find the best rates and closing costs, you need to shop around and compare all aspects of the offers, not just a few fees.  For example, choosing a lender with a slightly lower appraisal fee might seem like a good deal, but if that lender charges a margin that is 0.50% higher, it can cost you tens of thousands of dollars in interest over the life of the loan. 

It’s essential to look at the overall picture.  Consider your goals and how long you plan to stay in your home.  If your goal is to preserve equity, focus on finding a loan with the lowest interest margin, even if it has slightly higher upfront fees.  On the other hand, if you want the highest line of credit growth, a higher margin may be more beneficial, as it grows at a higher rate.

Educate yourself about the different options and what they mean for your financial situation.  Understanding your long-term and short-term goals will help you choose the best reverse mortgage for your needs.

ARLO explaining costs vs benefit

#2 Tip: Evaluating Reverse Mortgage Costs vs. Benefits

Reverse mortgages are not for everyone.  If the loan does not meet your needs and you will still struggle financially, you need to recognize that before using your home equity.  If the loan won’t make your life easier and you might need to sell your home in a few years, consider selling now instead of eroding your equity.  Making that move now can prevent more difficult decisions later.

A reverse mortgage is intended to be the last loan you ever need.  If you know you are not in your forever home, consider using a reverse mortgage to buy the right house instead of using it as a temporary fix, which might not be a proper solution at all.  Most borrowers benefit when they research and plan carefully.  Understand how these loans work, what your plans are, and which options best achieve your goals.

Frequently Asked Questions

 
Q.

Who owns the house on a reverse mortgage?

When you take out a reverse mortgage, you remain the owner of your home, just like with a traditional mortgage.  The reverse mortgage is simply a loan secured against your property.  You do not give up ownership to get a reverse mortgage.

 
Q.

How much money can I get from a reverse mortgage?

The amount of money you can get from a reverse mortgage depends on three factors: 1.  Age of the Youngest Borrower: The older you are, the more money you can get.  2.  Current Interest Rates: The lower the interest rates, the more money you can get.  3. Home’s Appraised Value: The value of your home also affects the amount you can borrow.  These factors together determine the Principal Limit Factor, which is the percentage of your home’s value that you can borrow.

 
Q.

How is the loan amount of a reverse mortgage determined?

The amount you can borrow through a reverse mortgage is calculated based on guidelines from HUD (the Department of Housing and Urban Development).  This calculation considers several factors: the value of your home, current interest rates, and your age.  These factors help determine how much money you can receive from the loan.  Additionally, the amount you currently owe on any existing mortgages is considered to decide how much money you can get in the first 12 months of the loan.

 
Q.

Can you get a reverse mortgage with a low credit score?

When it comes to reverse mortgages, your credit score isn’t a big concern.  However, your credit history still matters.  The program looks at your overall ability to pay your debts and keep up with the costs of owning your home.  If you’ve had trouble with credit in the past but have consistently paid your property taxes and insurance on time and haven’t had recent credit issues, you’re likely to qualify for a reverse mortgage as long as your income and property meet the standards set by HUD (the Department of Housing and Urban Development).  If you’ve been late on your taxes or insurance in the last two years, you might still be able to get the loan, but you’ll need to set aside money to cover future taxes and insurance payments.  Even if your recent credit activity isn’t great, you could still qualify for the loan, but you may also need this special set aside for taxes and insurance.
 
Q.

Is an appraisal required for a reverse mortgage?

Yes, an appraisal is required on all reverse mortgage transactions.  The appraiser is the eyes and ears of the lender and of HUD in the field, so not only is the appraisal required to determine a value but also to determine that there are no factors within the home itself or the immediate area that could impair the lender’s or HUD’s security.  HUD has property requirements and some restrictions, and there would only be a way to determine compliance with the on-site inspection.  In addition to ensuring that the home meets all the current HUD requirements, the lender and HUD must be sure that the property is in an acceptable minimum condition to qualify for the loan.  This can only be done with an appraisal and on-site inspection.  The appraiser will conduct a complete walk-through of the property, turning on all water faucets, making at least a “head and shoulders” inspection of the attic, and, although the appraiser is not a contractor, calling out any general instances of concern noted (roof repairs that may be needed, large cracks in the foundation, noted plumbing leaks, exposed wiring, etc.).

 
Q.

Do you still make a payment of some kind on a reverse mortgage?

As the homeowner, you are responsible for your taxes, insurance, and any other assessments on your property (i.e., HOA dues, if any).  No mortgage payments are due for as long as you live in the home as your primary residence, but you can choose to make a payment at any time.  There is no prepayment penalty with a reverse mortgage, so if you want to pay a payment in any amount, you may do so without penalty, but none are required as long as you live in the home and pay the property charges on a timely basis.

 
Q.

Can I sell my house if I have a reverse mortgage?

Yes, if you have a reverse mortgage, you can sell your house anytime without penalty.

 
Q.

Is there a penalty if I pay off my reverse mortgage early?

No, there is no penalty for paying off a reverse mortgage early.  You can pay any part of the loan—up to the full amount owed—at any time without any extra charges.  You can use your own funds, take out another loan, or sell your home to pay off the reverse mortgage.  It’s important to remember that you always own your home, so paying off the loan isn’t ‘buying the lender out;’ you’re simply choosing to repay what you owe.  Some people decide to make regular payments on their reverse mortgages.  Although payments aren’t required, you can choose to pay any amount at any time.  This can help reduce the growing loan balance or start paying it off according to your plan.  If you start making payments and stop for any reason, there’s no penalty because there were no required monthly payments.

 
Q.

How does a reverse mortgage get paid back?

A reverse mortgage loan is paid back when it reaches maturity or if the homeowner decides to sell their home or pay it off through other means.  When a reverse mortgage borrower passes away, the heirs to their property can either pay off the balance to keep the property or sell the home to pay off the loan balance.  If an heir inherits the property with a balance that exceeds the current market value, they can choose to pay the loan in full at 95% of the current market value, even when that is less than the amount owed.

 
Q.

What happens if I outlive the total value of my home?

You can stay in the home for as long as you continue to pay your taxes and insurance on the property and reasonably maintain the home, regardless of the loan balance and the value.  Outliving the home’s value does not affect your ability to remain in the property.  And your estate or heirs can never owe more than the property is worth.  A reverse mortgage is a non-recourse loan, which means that when you finally must leave the property, or you pass, your heirs can keep the home and pay off the loan at the amount owed or 95% of the current market value, whichever is less or they can walk away and owe nothing if they choose not to keep the property.  The lender cannot look to your estate or to your heirs to make up any shortfalls if the property does not sell for enough to repay the loan balance.  You pay for mortgage insurance as part of the loan, and if this were to happen, the lender would file a claim with HUD, and your insurance would pay for any shortfall.

 
Q.

Can you lose your home with a reverse mortgage?

Yes.  When taking a reverse mortgage, you agree to maintain property charges, such as taxes and homeowner’s insurance, and occupy your home as your primary residence.  (Defined by leaving at most six months).  If you fail to maintain the loan agreement, HUD requires the servicer to call the loan due and payable.  (Also See: 5 Ways To Lose Your Home With a Reverse Mortgage)

 
Q.

What are the disadvantages of a reverse mortgage?

Reverse mortgages have a few key drawbacks.  One significant limitation is that the property must be the borrower’s primary residence.  If you decide to move out and wish to keep the property as a rental, you must either refinance the reverse mortgage or pay it off entirely.  Additionally, reverse mortgages often entail higher closing costs compared to traditional loans.  This expense increase is primarily due to the mortgage insurance required for HUD-insured Home Equity Conversion Mortgages (HECMs), making it a costlier option upfront.

 
Q.

Why should you not get a reverse mortgage?

There are several important reasons to reconsider or delay obtaining a reverse mortgage, especially if you plan to sell your home in the near future.  Primarily, reverse mortgages are designed as long-term financial solutions rather than short-term fixes.  The initial expenses, including mortgage insurance and other upfront costs, can make it an impractical option for those looking to use it as a quick financial lever.  These costs can significantly diminish the benefits if the mortgage is not held for a substantial period, making it less advantageous for individuals who might move or sell their home shortly after securing the reverse mortgage.

 
Q.

Is a reverse mortgage a good idea?

Reverse mortgages are not inherently good or bad.  The decision should be based on your individual situation and long-term plans.  It can be a great idea if you plan to stay in your home for the foreseeable future, and a reverse mortgage allows you to live more comfortably.  However, if you plan to move later in retirement, consider alternatives like a reverse mortgage for a home purchase or other home equity loans.

Key Takeaways on Reverse Mortgages

  • Reverse mortgages allow seniors to borrow against the equity in their homes without making monthly mortgage payments.  The most common type is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration.
  • To qualify, you must be at least 62 years old, and the Principal Limit is based on the age of the youngest borrower.
  • The funds available are determined by the youngest borrower’s age, the home’s value, and current interest rates.
  • The loan must be repaid when the last surviving borrower dies, permanently leaves the home, or stops paying property taxes or homeowner’s insurance.
  • A reverse mortgage never has a payment due or a prepayment penalty.  Any remaining equity goes to the borrower’s heirs or beneficiaries.

What is a Reverse Mortgage & How Does it Work - Explained by ARLO™

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