A reverse mortgage is a loan that allows an eligible homeowner to access a portion of the equity in their home without making a required monthly principal and interest mortgage payment.
That sounds simple, but there are a few important things to understand.
You still own the home.
The lender does not take ownership of the property.
You are still responsible for property taxes, homeowners insurance, maintaining the home, and meeting the other requirements of the loan.
The main difference is how the loan works compared with a traditional mortgage.
With a traditional mortgage, you usually make monthly payments and the loan balance goes down over time.
With a reverse mortgage, you generally do not make a required monthly principal and interest payment, and the loan balance usually increases over time as interest and other charges are added.
For the right homeowner, that can create more monthly cash flow and access to home equity.
For someone else, it may not be the right fit.
The important thing is understanding how it works before deciding whether it makes sense.
Step 1: You Need Enough Equity in the Home
A reverse mortgage is based on the equity in your home.
That does not mean you have to own the property free and clear.
Many reverse mortgage borrowers still have an existing mortgage.
If there is a current mortgage, it generally needs to be paid off as part of the reverse mortgage transaction.
Whether there is enough equity depends on several factors, including:
- Age
- Home value
- Current mortgage balance
- Interest rates
- Type of reverse mortgage
- Program guidelines
For example, someone with a home worth $700,000 and a $75,000 mortgage balance is in a very different position from someone with the same home value who owes $400,000.
The value of the home may be the same.
The available equity is not.
Step 2: The Amount Available Is Calculated
One of the biggest misconceptions about reverse mortgages is that a homeowner can simply borrow all of the equity in the home.
That is not how it works.
The amount available is based on a formula.
For a traditional HECM reverse mortgage, factors can include:
- Age of the youngest borrower
- Age of an eligible non-borrowing spouse, when applicable
- Home value
- Current interest rates
- FHA program limits
- Existing mortgage balance
In general, older borrowers may be able to access a larger percentage of the home’s value than younger borrowers, all else being equal.
Interest rates also matter.
There is no one percentage that applies to every homeowner.
The only way to know what may be available is to look at the actual numbers.
Step 3: The Existing Mortgage Is Paid Off
If you currently have a mortgage, that loan generally needs to be paid off when the reverse mortgage closes.
This is one of the main reasons homeowners use a reverse mortgage.
For example, suppose someone is retired and still has a $1,800 monthly mortgage payment.
If the reverse mortgage provides enough proceeds to pay off that loan, the homeowner may be able to eliminate that required monthly principal and interest mortgage payment.
That can improve monthly cash flow considerably.
However, the homeowner is still responsible for:
- Property taxes
- Homeowners insurance
- HOA dues if applicable
- Maintenance
- Other required property charges
So when people say a reverse mortgage means “no mortgage payment,” what they really mean is generally no required monthly principal and interest mortgage payment.
The other costs of owning the home do not disappear.
Step 4: You Choose How to Receive the Available Proceeds
Depending on the type of reverse mortgage and the loan structure, proceeds may be available in several ways.
That can include:
- Line of credit
- Monthly payments
- Lump sum in certain situations
- A combination of options
Not every option is available with every reverse mortgage.
The best choice depends on what the homeowner is trying to accomplish.
Someone trying to eliminate an existing mortgage may use a large portion of the available proceeds at closing.
Someone else may prefer to leave as much money as possible in a line of credit for future use.
Another homeowner may want monthly payments to supplement retirement income.
There is no one structure that is right for everybody.
Reverse Mortgage Line of Credit
The line-of-credit option is one of the features many homeowners find interesting.
Instead of taking all available proceeds at closing, a homeowner may be able to leave some of the money available for future use.
That money may later be used for things such as:
- Home repairs
- Medical expenses
- Emergency expenses
- Retirement income
- Travel
- Helping with monthly expenses
- Other personal needs
A reverse mortgage line of credit is different from a traditional home equity line of credit.
The qualification process is different.
The payment requirements are different.
The way the available line may change over time is also different.
If you are comparing a reverse mortgage line of credit with a HELOC, it is important to look at the entire structure and not just the interest rate.
[Learn More About a Reverse Mortgage Line of Credit]
What Happens to the Loan Balance?
With a traditional mortgage, you usually make monthly payments and the loan balance decreases.
With a reverse mortgage, the opposite usually happens.
Because there is generally no required monthly principal and interest payment, interest and certain loan charges are added to the balance.
That means the amount owed usually increases over time.
At the same time, the home’s value may also increase or decrease depending on the housing market.
The homeowner still owns the property and can choose to make voluntary payments toward the reverse mortgage if desired.
There is generally no requirement to wait until the loan becomes due to pay some or all of it back.
When Does the Reverse Mortgage Have to Be Repaid?
A reverse mortgage does not continue forever.
The loan generally becomes due when a maturity event occurs.
Common examples include:
- The last borrower sells the home
- The last borrower permanently moves out
- The last borrower dies
- The property is no longer the borrower’s principal residence
- The borrower fails to meet certain loan obligations
There can be special protections for an eligible non-borrowing spouse, depending on the situation and program requirements.
This is one of the reasons it is important to structure the loan correctly from the beginning.
What Happens If You Sell the Home?
You can sell a home that has a reverse mortgage.
The reverse mortgage is paid off from the sale proceeds, just like a traditional mortgage.
Any remaining equity belongs to the homeowner.
For example, if the home sells for $700,000 and the reverse mortgage balance is $300,000, the loan would be paid off and the remaining equity, after normal selling costs, would go to the homeowner.
The lender does not automatically receive the entire value of the home.
What Happens When the Borrower Dies?
This is one of the most common questions families ask.
A reverse mortgage does not automatically mean the lender gets the house.
When the last borrower dies, the loan generally becomes due.
The heirs may have several options.
They may be able to:
- Pay off the reverse mortgage and keep the home
- Refinance the balance into another loan
- Sell the home and repay the reverse mortgage
- Allow the property to be turned over to the lender if that makes the most sense
With an FHA-insured HECM, there are protections that can be important if the loan balance is greater than the home’s value.
[Learn More About Reverse Mortgages and Heirs]
Do You Still Own the Home?
Yes.
This is one of the biggest misconceptions about reverse mortgages.
The bank does not take title to your home simply because you have a reverse mortgage.
You remain the owner.
The reverse mortgage is simply a loan secured by the property.
That is very similar to the way a traditional mortgage is secured by the home.
The difference is mainly in how repayment works and when payments are required.
What Are You Still Responsible For?
This is extremely important.
A reverse mortgage does not eliminate the normal responsibilities of homeownership.
You are still responsible for things such as:
- Property taxes
- Homeowners insurance
- Flood insurance if required
- HOA dues if applicable
- Maintaining the home
- Keeping the home as your principal residence
If those obligations are not met, the loan can eventually become due.
That is why reverse mortgage lenders perform a financial assessment before approving the loan.
They want to make sure the homeowner appears able to continue paying these ongoing costs.
What Is the Financial Assessment?
A reverse mortgage does not use the same type of underwriting as a traditional mortgage, but that does not mean the lender ignores income and credit.
The lender may review:
- Income
- Credit history
- Existing debt
- Property tax payment history
- Homeowners insurance payment history
- Residual income
- Other financial obligations
The lender is trying to determine whether the homeowner is likely to be able to continue paying the expenses associated with the property.
A lower credit score does not automatically mean someone cannot qualify.
The overall financial situation matters.
Is Counseling Required?
For an FHA-insured HECM, yes.
The borrower must complete reverse mortgage counseling with an approved counselor before the loan can close.
The counseling session is designed to help the homeowner understand:
- How the loan works
- Costs
- Responsibilities
- Alternatives
- When the loan becomes due
- How the loan may affect heirs
I actually think this is one of the better parts of the HECM program.
A reverse mortgage is a major financial decision.
The homeowner should understand exactly how it works before moving forward.
How Is a HECM Different From a Proprietary Reverse Mortgage?
A HECM is the FHA-insured reverse mortgage program.
It is generally available to eligible homeowners age 62 and older.
There are also proprietary reverse mortgage programs offered by private lenders.
Depending on the state and lender, some proprietary programs may be available starting as young as age 55.
These programs are not FHA insured.
They may have different:
- Age requirements
- Loan amounts
- Property requirements
- Home value requirements
- Underwriting guidelines
- Available proceeds
They can sometimes be useful for younger borrowers or homeowners with higher-value properties.
[Learn More About Jumbo & Proprietary Reverse Mortgages]
Can You Use a Reverse Mortgage to Buy a Home?
Yes.
A reverse mortgage can also be used to purchase a new primary residence.
This is commonly called a HECM for Purchase when using the FHA-insured program.
The borrower contributes a portion of the purchase price with their own funds, and the reverse mortgage provides the remaining financing.
This can be useful for homeowners who want to:
- Downsize
- Relocate
- Move closer to family
- Purchase a home better suited for retirement
- Keep more cash available after selling another property
[Learn More About Reverse Mortgage Purchase Loans]
Does a Reverse Mortgage Make Sense for Everyone?
No.
I would never say that every homeowner who qualifies should get one.
A reverse mortgage is simply a financial tool.
Like any financial tool, it can be very useful in the right situation and completely wrong in another.
A reverse mortgage may be worth looking at if your goal is to:
- Eliminate an existing monthly principal and interest mortgage payment
- Improve monthly cash flow
- Access home equity
- Establish a line of credit
- Supplement retirement income
- Purchase another primary residence
- Keep more cash or investments available
On the other hand, if you plan to move soon, want to leave the home completely debt-free to heirs, or have another less expensive option that accomplishes the same goal, a reverse mortgage may not make sense.
The goal should never be simply to qualify.
The goal should be to determine whether the loan improves your financial situation.
A Simple Reverse Mortgage Example
Suppose a homeowner is 72 years old.
The home is worth approximately $750,000.
There is still a $150,000 mortgage.
The homeowner wants to eliminate the current monthly mortgage payment and create some additional financial flexibility.
A reverse mortgage may potentially be used to pay off the existing $150,000 mortgage.
Depending on the borrower’s age, interest rates, home value, and program guidelines, there may also be additional proceeds available.
Those additional funds might be taken as a line of credit, monthly payments, or another available option.
The homeowner would no longer have the old required monthly principal and interest payment.
However, the homeowner would still need to pay property taxes, homeowners insurance, and maintain the property.
That is the basic idea.
The actual numbers will be different for every homeowner.
How Do You Know If a Reverse Mortgage Will Work?
You really only need a few pieces of information to get a good starting point:
- Age of the youngest borrower
- Approximate home value
- Current mortgage balance
- Property type
- State where the home is located
- What you are trying to accomplish
From there, we can look at whether a reverse mortgage may be realistic and which type of program may make sense.
You do not need to understand every reverse mortgage guideline before contacting me.
That is part of my job.
Want to See How a Reverse Mortgage May Work for You?
If you are considering a reverse mortgage, tell me what you are trying to accomplish.
Maybe you want to eliminate an existing mortgage payment.
Maybe you want a line of credit.
Maybe you are trying to supplement retirement income.
Maybe you want to purchase another home.
Or maybe you are simply trying to understand whether a reverse mortgage makes sense.
We can look at the numbers and go from there.
Call or text Shawn at (714) 271-8524 or email Info@TheBroker.Finance to discuss your reverse mortgage options.
[Learn More About Reverse Mortgage Requirements]
[Learn More About HECM Reverse Mortgages]
[Contact Shawn]
This information is for educational purposes only and is not a commitment to lend. Reverse mortgage eligibility, proceeds, rates, costs, and program requirements vary based on the borrower, property, lender, and current program guidelines.