A reverse mortgage is a loan product commonly used by senior homeowners with substantial home equity to supplement retirement income. These loans make it easy to access the equity they’ve built up over time to cover expenses. Plus, you’ll no longer have to make monthly mortgage payments. Even better, the borrowing costs are often lower than what you’ll find with many other loan products.
This guide dives into how reverse mortgages work, who is eligible for these loans, the different loan types and how to decide if it’s right for you.
What is a Reverse Mortgage?
When you take out a conventional mortgage, you’ll make monthly principal and interest payments to the lender over a period of 10, 15, 20 or 30 years. But a reverse mortgage works the opposite way – the lender will pay you either in a lump sum, through a line of credit or over time. Furthermore, your monthly mortgage payment will go away, and you can stay in your home.
You’re not required to repay these funds, which are borrowed from your equity unless you relocate. But the loan must be repaid when the borrower dies. So, the lender will end up selling the home to recoup a portion or all of the loan unless your heirs opt to purchase it from the lender. The lender will also hold off from selling if a non-borrowing spouse still lives in the home. Otherwise, any of the proceeds remaining from the sale will go to the borrower’s estate.
How a Reverse Mortgage Works
The process for taking out a reverse mortgage loan is similar to what you’ll find with traditional mortgages. However, if you have enough equity in your home – preferably 50 percent or more – you can apply for the reverse mortgage product that best suits your needs.
After completing the loan application, the lender will review your financials, conduct a credit check, assess the property and ensure the title is clear. An appraisal is also required to confirm that you have enough equity to qualify for a reverse mortgage.
Once the loan application is approved, you’ll receive the funds through your selected disbursement method. You can choose to be paid in a lump sum, in monthly installments for a set period or until the loan is no longer active (due to your death or relocation), or through a line of credit that grows over time.
You’re free to use the funds as you see fit. However, some lenders implement spending restrictions, so it’s best to review the loan agreement carefully to ensure you comply with the terms and conditions.
Can Anyone Take Out a Reverse Mortgage?
No. Reverse mortgages are reserved for homeowners who are at least 62 years old.
How Do You Qualify for a Reverse Mortgage?
Before you can take out a reverse mortgage, you’ll need to meet the following eligibility criteria:
- Be at least 62 years of age
- Live in a single-family home, multi-family home (no more than four units), manufactured home (constructed after June 1976), condo or townhome
- Own your home outright or have at least 50 percent in equity
- Use your home as your primary residence
- Complete a reverse mortgage counseling session with a HUD (Housing and Urban Development) certified counselor (if you’re applying for a government-backed product)
- Not have any delinquent federal debt
- Have the means to afford payments for homeowners insurance, homeowners association fees and property taxes.
Be mindful that these requirements are general guidelines. Each lender has its own rules that could be more stringent than what’s listed here.
What are the Types of Reverse Mortgages?
There are three types of reverse mortgage products to choose from:
- Home Equity Conversion Mortgage (HECM): HECMs are government-backed reverse mortgage products that can be used for several purposes. Your borrowing costs may be on the higher end, but you can choose how the funds are disbursed to you.
- Single-Purpose Reverse Mortgage: Offered through state and local government agencies or nonprofits, these loan products are the most affordable option. However, they’re only accessible in select areas and are designed to cover specific costs, like home renovations.
- Proprietary Reverse Mortgage: You can find these loans through private lenders. They’re generally easy to access and feature rapid funding times. Unfortunately, you’ll also find that scams are most prevalent with these types of mortgages as well.
Other Things You Need to Consider When Taking Out a Reverse Mortgage
Before applying for a reverse mortgage, keep the following in mind:
Fees and Other Costs
Compare the fees charged by the lenders you’re considering. They include loan origination fees, closing costs and servicing fees (if applicable). Also, be mindful of interest rates, as a slight increase of just one percent could add several thousand more to your loan balance.
Your Loan Grows Over Time
Remember, the lender pays you with a reverse mortgage. So, the loan grows over time as interest and fees accrue and are added to the balance.
Interest Rates May Change
If the reverse mortgage you select comes with a variable interest rate, it will likely change over time with market conditions.
You’ll still be responsible for property tax and homeowners insurance payments when you take out a reverse mortgage. If you live in a deed-restricted community, HOA dues and other assessments are also your responsibility. Furthermore, you must maintain the home and make necessary repairs. Otherwise, the reverse mortgage could become payable.
Your Heirs and Their Inheritance
If you want your heirs to inherit the home, they’ll have to repay the lender what’s owed on the reverse mortgage to keep it. Otherwise, the property will be sold, and any remaining proceeds from the transaction (if applicable) will go to your estate. But if the home sells for less than it’s worth, your heirs won’t be responsible for the difference.
Mortgage Insurance Premiums
Government-backed reverse mortgages require borrowers to pay mortgage insurance premiums. The upfront cost is 2 percent of the total loan amount. Plus, you’ll pay 0.5 percent annually in premiums.
Is a Reverse Mortgage Right for You?
- You’re an older homeowner, and your costs in retirement are far more than you anticipated.
- Your home is paid off, or you have a significant amount of equity.
- You don’t plan to pass your home down to your heirs.
- You have minimal cash reserves.
However, it may not be ideal if:
- You don’t have much equity in your home.
- You have a sizable amount of money saved or life insurance policies with cash value.
- You have other relatives in your home that will stay if you pass away.
- You want your home to remain in the family.
Where to Get a Reverse Mortgage
If you’re considering a reverse mortgage, look no further than Top Flite Financial. As a full-service mortgage lender and a leading originator of Home Equity Conversion Mortgages (HECM) backed by the federal government, Top Flite Financial is a reputable choice for your reverse mortgage needs. They are also accredited by the Better Business Bureau with an A+ rating, and they prioritize customer satisfaction.
To get started, complete the online form on this page to request a free consultation with a Top Flite reverse mortgage expert.
Frequently Asked Questions About Reverse Mortgages
There are several reasons why a reverse mortgage could be beneficial to you during retirement. For starters, it’ll give you access to cash to supplement your retirement, and you won’t have to add another monthly loan payment to your budget. Instead, the funds you get will come from the equity in your home.
Another significant perk is the ability to stay in your home without having to worry about costly monthly mortgage payments. Plus, you have the ability to receive monthly payments for the rest of your life, assuming you select the tenure disbursement option, and you are free to use the money however you see fit. And you won’t pay taxes on the money you get from a reverse mortgage.
Before applying for a reverse mortgage, there are also some drawbacks to consider. These loan products come with borrowing costs that are typically steeper than you’ll find with traditional mortgage products. Plus, you’ll still be responsible for property taxes, homeowners insurance, CDD and HOA payments even after taking out a reverse mortgage. Failure to cover these costs or not using the home as your primary residence will result in foreclosure.
It’s also more challenging for your heirs to inherit the home when you pass away if you take out a reverse mortgage. You should also know that receiving funds from a reverse mortgage could impact the benefits you get from need-based government programs.
The easiest way to get out of a reverse mortgage without incurring monetary penalties is through your right of rescission or the three-day period immediately following closing. This is your legal right, but you must notify the lender in writing that you would like to back out of the loan.
If it’s been more than three business days or you’re well past the cancellation window, you can refinance into a conventional loan, which means you’ll have to resume monthly mortgage payments. Other options include paying the loan in full if you have the reserves handy to do so, selling your home and using a portion or all of the profit to pay the loan in full or swapping out your current reverse mortgage with a new one through a refinance.
Yes. You’re allowed to sell your home if you take out a reverse mortgage without incurring early repayment fees. However, be mindful that you’ll generally have to pay the loan in full unless it has matured.
Are there red flags to be on the lookout for when evaluating reverse mortgage lenders?
Unfortunately, the reverse mortgage market is ripe with scammers looking to prey on innocent seniors. You can protect yourself, though, by being on the lookout for some common red flags that clearly indicate you’re dealing with a scammer or shady lender.
These include lenders who are overly aggressive and pressure you to move forward with applying for a reverse mortgage without ironing out the details, reviewing the fine print with you or answering any questions you may have. Another sign of a scammer is a representative claiming to be a loan officer of a company that you’re having trouble locating through online research, or that isn’t licensed to do business in your state. Also, steer clear of lenders who suggest that you forgo reverse mortgage counseling or urge you to invest the loan proceeds with a company they’re affiliated with to purchase investment properties, stocks or bonds.
If you need to tap into your home equity but a reverse mortgage isn’t ideal for your financial situation, there are alternatives worth considering. Start by analyzing your spending plan to identify areas where you can cut costs. You can also sell your home and downsize it into something much smaller and more affordable. Then, depending on how much you earn from the sale, it may be possible to purchase the new property using cash.
If neither of these is an option, you can rent out the home for some time and move into a cheaper space if you wish to keep the property in the family. Or you can pull from a life insurance policy that’s accumulated a sizable amount of cash value. Or if you have retirement savings, that’s another option to get access to the cash you need.
Other options that involve taking on more debt include a home equity loan or a home equity line of credit. Both generally come with competitive interest rates and generous loan terms. Still, they act as second mortgages, which means you could lose your home if you fall behind on the loan payments.
Refinancing into a conventional mortgage could also be worthwhile if you want to stay in your home but seek a more affordable monthly payment. With a rate-and-term refinance, you’ll either get a lower interest rate or the lender will reset the loan term to lower your payments.