What Is a Reverse Mortgage?

Is it even daytime TV if you don’t catch an ad or two featuring charming, silver foxes like Tom Selleck, Henry “the Fonz” Winkler, or Joe Namath telling you about the benefits of a reverse mortgage?

The spokesperson may change, but the message rarely does: “You’ve worked hard to pay down or even pay off your mortgage. Now is the time to use the equity in your home to finance the rest of your life.”

A reverse mortgage can be a legitimate option for homeowners who are close to retiring and want to make sure they can cover their day-to-day costs – and are determined to keep living in their own homes.

Reverse mortgages may read like an ideal solution on paper – but beware of the fine print. They can carry significant risks that homeowners and their families need to take into serious consideration.

That’s why it’s important to fully understand what a reverse mortgage is and what you may – or may not – be getting into.

How Do You Define a Reverse Mortgage? 

Like a traditional mortgage, a reverse mortgage is a loan that lets you use your home as collateral. The homeowner borrows against the home’s equity (the difference between the value of your home and what you owe), and loan payments are put off until the homeowner dies, moves or sells the home.

The home stays in the homeowner’s name. And instead of making monthly payments, the amount you owe on the loan goes up every month because the amount you borrowed (plus interest and fees) adds up over the life of the loan.

Am I Eligible for a Reverse Mortgage?

You don’t need a certain income or a stellar credit score to qualify for a reverse mortgage, which benefits many homeowners. But there are some eligibility requirements for borrowers:

• You must be at least 62 years old to qualify for a HECM.
• You own the home entirely or have a substantial amount of equity built up. The amount in equity is generally 50%, but it’s different for every lender.
• You live in a manufactured home or mobile home built on or after June 15, 1976. Mobile and manufactured homes older than this aren’t considered safe enough to meet lenders’ rigorous standards.
• You must allow a review of the home’s appraised value and financial profile. This information is assessed along with current interest rates to judge the borrower’s ability to pay property taxes and homeowners insurance. It also helps the lender estimate the loan amount.
• You must be on the FHA-approved condo list if you live in a condo. This requirement only needs to be met if the borrower is applying for a HECM. Some proprietary reverse mortgage providers accept condos that are not on the list.

How Does a Reverse Mortgage Work?

On a reverse mortgage, your home serves as collateral. The earnings from its eventual sale by you or your heirs repay the loan and its related fees, interest and insurance. The balance and interest are paid back to the lender when the house is sold or the homeowner dies.

If you or your family owe less on the reverse mortgage than you make on the sale of the house, you might have extra money after the reverse mortgage is paid off. 

What Can a Reverse Mortgage Be Used For?

A reverse mortgage can give you a large amount of money, but you can’t spend it on just anything. That trip to Key Largo won’t make the list, but you can use a reverse mortgage to:

• Eliminate monthly mortgage payments
• Consolidate debts
• Provide in-home care
• Fund projects or renovations on the home
• Purchase a new home with a home equity conversion mortgage (HECM) 
• Supplement income to allow other assets (like stocks) to grow
• Fund emergency accounts or boost savings 
• Protect home equity from declining home markets

Keep in mind that what you can use a reverse mortgage for depends on what type of reverse mortgage you get. 

What Are the Types of Reverse Mortgages?

The most common type of reverse mortgage is a home equity conversion mortgage (HECM). HECMs allow you to access your existing home equity for a loan. 

The other types of reverse mortgages are proprietary reverse mortgages and single-purpose reverse mortgages. 

• Proprietary reverse mortgages: Often offered to homeowners with high home values
• Single-purpose reverse mortgages: Offered to homeowners with low or moderate incomes

Generally, the older you are and the more equity you have built up, the more you’ll be offered for a reverse mortgage.

Eligibility (you or your relative)	Reverse Mortgage Type	Mortgage Details
62 and older (home valued at less than $765,600 with at least 50% equity in the home)	Home Equity Conversion Mortgage	Federally insured by the Federal Housing Administration (FHA) through the Department of Housing and Urban Development (HUD) Can be more expensive and have extra costs Allows homeowner to use the funds for almost any home-related reason
62 and older (low- or middle-income homeowners who need a loan to pay for home improvements or property taxes)	Single-Purpose Reverse Mortgage	Offered by some state and local government agencies as well as nonprofit organizations Isn’t available everywhere in the country Is the least expensive Good if you only plan to stay in your home temporarily or borrow a small amount
62 and older (home valued at more than $765,600 with at least 50% equity in the home)	Proprietary Reverse Mortgage (aka Jumbo Reverse Mortgage)	A private loan backed by the lender’s company or company that created itIs like HECMs with upfront costs May allow you to qualify for more money if your home is worth a lot and you owe little on your mortgage

How Do You Get Your Reverse Mortgage Money?

With a reverse mortgage, the lender pays you the way you want – and there are a few different ways to access the money. 

Most people are likely to take out a HECM loan. Let’s look at the different ways that you can access that money:

• Lump sum: You get a one-time, lump-sum payment for the full amount of the loan.
• Equal monthly payments (annuity): You get a fixed, monthly payment for as long as you live in the home. This is also called an annuity plan.
• Term payments: These are similar to annuity plans, but the monthly payment expires after a set period of time. Like annuity plans, there’s an adjustable interest rate.
• Line of credit: This form of payment allows you to withdraw from the loan in the amounts you choose.
• Equal monthly payments plus a line of credit: This option combines equal monthly payments (as described above) with access to a line of credit. 
• Term payments plus a line of credit: This option combines term payments (as described above) with access to a line of credit. 

You’ll need to exercise a lot of caution – and restraint – with reverse mortgage lines of credit.

It’s easy to start treating that line of credit like it’s a bottomless resource, but that is far from the case. Consult with a financial planner to help you learn to manage your loan responsibly and avoid costly mistakes.

What Responsibilities Come With a Reverse Mortgage?

Let’s talk about the responsibilities of a reverse mortgage. 

General reverse mortgage requirements

• The borrower must live in the home as their primary residence for at least 6 months out of the year.
• The borrower must continue to pay property taxes, utilities, homeowners insurance and maintain the home.
• You, or in some cases, your heirs must pay the loan back once the borrower is no longer in the home for more than a year.
• The home needs to maintain its value so the lender can see a reasonable return on their loan from the sale of the home. 
• If the homeowner dies or the requirements of the loan aren’t met, the lender can take possession of the home after 4 months of missed mortgage insurance premium payments. 
• The lender can choose to foreclose on the home if the borrower isn’t meeting their obligations and has received a 90-day notice.

Education requirements

Prospective HECM reverse mortgage borrowers must complete a HUD-approved counseling session. These sessions usually cost about $125, but the provider can charge more or less than that. 

Borrowers with incomes at or below 200% of the federal poverty level cannot be charged a fee. A session usually lasts between 60 – 90 minutes. During the session, you discuss your financial circumstances and explore available loan options besides reverse mortgages.

How Should You Choose a Reverse Mortgage Lender?

Reverse mortgage loans can be risky for both lenders and borrowers, so not every lender offers them. (If you’ve seen the movie “Hell or High Water,” you know the entire bank-heist plot revolves around paying off a reverse mortgage loan!) 

It can be tempting to follow through with the first lender that offers you a loan, but every loan comes with different costs, including:

• Origination fees when you enter the agreement
• Closing costs as you finalize the deal 
• Other fees over the life of your new mortgage
• Mortgage insurance premiums (MIPs) for HECMs

Look at different mortgage lenders. Take all of these costs into account before you settle on one.

How Can You Steer Clear of a Reverse Mortgage Scam?

Unfortunately, older adults are primary targets for many types of scams. 

Because reverse mortgages are marketed to older homeowners, scammers will exploit the opportunity to take advantage of you or your loved one. Knowing what to look out for can help protect you or your relatives from long-term financial difficulties. 

Contractor scams

A contractor may encourage older adults to undertake large, expensive home improvement projects and finance them with reverse mortgage loans – loans they’re not financially prepared to handle or can’t meet the long-term requirements. 

The contractor gets paid, but the homeowner is left to face long-term financial troubles, including the risk of losing their home.

Veterans scams

The Department of Veterans Affairs (VA) does not offer reverse mortgages. 

You may see ads online that offer veterans special deals on reverse mortgages through the VA. We can’t stress this enough: These special deals are fake. 

Keep a sharp eye out for these scams. And make sure the older adults in your life are aware and are on high alert.

If you think you or a loved one is being scammed or you have your suspicions about a lender, contact one of the resources below to file a report:

• U.S. Department of Housing and Urban Development
  HECM program
  800-CALL-FHA 
• Consumer Financial Protection Bureau
  (855) 411-CFPB 
• AARP Foundation
  Reverse mortgage education project
  (800) 209-8085

Is a Reverse Mortgage Right for You? 

If you or an older loved one is thinking about a reverse mortgage, always keep in mind that you are borrowing against your home – which is likely one of the most valuable assets you own.

If you’re not careful, you and your family could end up losing the home and all of the wealth built up in it. Explore all your options – and make sure your family is part of the discussion. 

It’s your home now, but someday, it may be your family’s.