Reverse Mortgages

How Reverse Mortgages Work

If you’re 62 or older, you might qualify for a reverse mortgage. With a reverse mortgage, the amount of money you can borrow is based on how much equity you have in your home. (Your equity is how much money you could get for your home if you sold it, minus what you owe on your mortgage.) While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky:

A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you’re still borrowing the money and paying the lender a fee and interest. Your debt keeps going up (and your equity keeps going down) because interest is added to your balance every month. This can use up much – or even all ─ of your equity.

A reverse mortgage can limit your options down the road. Generally, a reverse mortgage must be paid back when you die or move from the home. You could use up your equity, so you get nothing when you or your estate eventually sells the home. That means you could come up short if you want to move to a smaller home, an assisted living facility, or to another locale to be closer to family.

A reverse mortgage can be an expensive way to borrow. The fees and other costs to borrow money this way can be higher than other alternatives like a home equity loan or home equity line of credit.

To qualify for the most common reverse mortgages, you must

• be 62 or older
• live in the property, which has to be where you live most of the time
• have paid off a substantial amount of your mortgage
• have enough funds to keep paying expenses related to the property because you’re still responsible for taxes, insurance, repairs, and homeowner association fees
• participate in a counseling session with a counselor approved by the Department of Housing and Urban Development (HUD)
• apply and be approved by a lender, and
• not have any outstanding federal debt, like unpaid taxes.

Typically, the money you get through the reverse mortgage is tax-free and won’t affect your Social Security or Medicare benefits. Generally, you, your spouse, co-borrower, or your estate repays the loan when you die, sell your home, or move out.

How reverse mortgages are different from regular mortgages, home equity loans, and home equity lines of credit (HELOCS)

With a regular mortgage, you borrow a lump sum of money and make monthly payments to your lender to pay it back. Part of your payment goes towards the principal (the amount you borrowed) and part goes to paying the interest. Your equity grows, and the balance of what you owe goes down over time.

With a reverse mortgage, you borrow money from the lender, based on the amount of equity you have in your home. The lender may send you the funds from the reverse mortgage in one lump sum payment, a series of monthly payments, or some combination of those. But no matter how the money gets distributed to you, the lender adds interest each month to the balance you owe (the principal). That means your balance goes up over time, increasing the amount you have to pay, and you have less and less equity in your home.

 

Differences between regular mortgages and reverse mortgages
	Regular Mortgages	Reverse mortgages
Age requirement	None. You cannot legally commit to a mortgage until you’re 18, unless you have a co-signer	Must be 62 or older
What you borrow	Usually a lump sum to buy your property	An amount based on a percentage of the equity you’ve built up in your property
How the payments work	You pay the lender each month to pay back the loan, plus taxes and insurance	Lender pays you a lump sum or monthly payments — like an advance payment on your equity But you still must pay taxes and insurance, and you must maintain the property
The balance you owe	Goes down over time Generally, your monthly payment already includes interest	Goes up over time You will owe more than the amount you borrowed because interest is added every month Mortgage must be repaid when you die or move out – usually by selling your home
Is interest tax deductible?	Yes — for the interest paid each year, up to a certain amount	Not until you pay the loan back

Comparing reverse mortgages, home equity loans, and home equity lines of credit

A reverse mortgage lets you borrow money based on the equity you have in your home — but it’s not the same as a home equity loan or a home equity line of credit (HELOC).

	Reverse Mortgage	Home Equity Loan	HELOC
What is it?	An amount you borrow, based on the equity in your home	A fixed amount you borrow for a fixed amount of time, secured by your home	A revolving line of credit, secured by your home
How do I get the money?	Can be a lump sum, monthly payments, or a combination	Typically can get all the money at once up-front	Generally can draw funds as needed (like a credit card)
Age requirement	Must be at least 62	None. You cannot legally commit to a mortgage until you’re 18, unless you have a co-signer.	None. You cannot legally commit to a mortgage until you’re 18, unless you have a co-signer.
Other requirements	Must own home outright or have small mortgage	Usually must have at least 20% equity in home	Usually must have at least 20% equity in home

Things To Consider Before You Get a Reverse Mortgage

Before you decide that a reverse mortgage is the right choice for you, consider:

How a reverse mortgage could affect your family. Find out if your spouse will be able to stay in the home after you die.

What your heirs will owe. Before you agree to a reverse mortgage, check to be sure it has what’s called a “non-recourse” clause. Most reverse mortgages have this clause — it means that you, or your estate, can't owe more than the value of your home when the loan becomes due and the home is sold.

How long you plan to stay in your home. The costs and fees for some reverse mortgages may be more expensive if you stay in the home a short time, and if you borrow a small amount of money.

Shopping for a Reverse Mortgage

Take your time

Some salespeople try to rush you through the process. Stop and check with a counselor or someone you trust before you sign anything. A reverse mortgage can be complicated and isn’t something to rush into. If you feel pressured to urgently complete the deal — walk away.

Resist pressure to buy other financial products

Don’t rely on a salesperson to know what’s in your best interest. Some salespeople might suggest ways to invest the money from your reverse mortgage — even pressuring you to buy other financial products, like an annuity or long-term care insurance. If you buy these products, you could lose the money you get from your reverse mortgage. You don’t have to buy any financial products, services, or investment to get a reverse mortgage. In fact, in some situations, it’s illegal to insist that you buy other products to get a reverse mortgage.

Some salespeople offering home improvement services might suggest a reverse mortgage as an easy way to pay for repairs — especially in the wake of a natural disaster. Before you decide to use a reverse mortgage to pay for needed repairs or improvements, shop around for different contractors and reverse mortgage companies, and consider other types of financing, like home equity loans, home equity lines of credit, or refinancing your current home mortgage. That way, you’ll be able to accurately compare the cost of the work being done — but also the costs and fees you’ll pay, including if you get a reverse mortgage. The Consumer Financial Protection Bureau also has advice on what to do if you already have a reverse mortgage and a natural disaster damaged your home.

Understand the types of reverse mortgages

If you’re considering a reverse mortgage, shop around and ask questions. Choosing which type of reverse mortgage is right for you might depend on what you want to do with the money. A counselor can explain the features of the three types of reverse mortgages available.

• Home Equity Conversion Mortgages (HECMs). These are the most common type of reverse mortgage — you can use them for any purpose. They are federally-insured by HUD, but that insurance doesn’t protect the homeowner. It guarantees the lender gets their money if you’re not able to repay the reverse mortgage.

Typically, there aren’t income requirements to get a HECM. But lenders have to evaluate your finances and make sure you can both pay back the loan and keep up the house when they’re deciding whether to approve and close your loan. The lender may require you to set aside the money to pay things like property taxes, homeowner’s insurance, and flood insurance.

HECMs give you bigger loan advances at a lower total cost than private loans do. Also, a HECM borrower generally can live in a nursing home or other medical facility for up to 12 consecutive months before they have to repay the loan.

• Single-purpose reverse mortgages. Some state and local government agencies or nonprofits offer single-purpose reverse mortgages, which are the least expensive reverse mortgage option. You can use them for only the purpose that the lender specifies — for instance, home repairs or property taxes. Most homeowners with modest incomes can qualify for these loans. Find out if you qualify for any low-cost single-purpose loans in your area. Staff at your local Area Agency on Aging may know about the programs in your area. Find the nearest Agency on Aging or call 1-800-677-1116. Ask about “loan or grant programs for home repairs or improvements,” “property tax deferral,” or “property tax postponement” programs, and how to apply.

• Proprietary (private) reverse mortgages. These are offered by private lenders and may have a higher interest rate. If you own a home appraised at a high value (and you have a small mortgage), you may be able to get more money. But you will increase your debt and possibly use up your equity. It can be an expensive way to borrow money that limits your options down the road.

Meet with a housing counselor

Visit HUD’s website for a list of counselors, or call the agency at 1-800-569-4287. Counseling agencies usually charge a fee for their services, often around $125, although it can be more. This fee can be paid from the loan you get, and you cannot be turned away if you can’t afford the fee.

If you’re applying for a HECM reverse mortgage, you must meet with a counselor from an independent government-approved housing counseling agency first. Some lenders offering proprietary reverse mortgages also require counseling. The counselor must explain the HECM’s costs, financial implications, and possible alternatives to a reverse mortgage (like a home equity loan or line of credit, refinancing your mortgage, or selling your home and downsizing to save money.) Ask them to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time.

Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates. They show the projected annual average cost of a reverse mortgage, including all the itemized costs.

Understand all the reasons why you might need to repay the loan before you were planning to. For instance, you might need to repay the loan early because you need to move out of the house sooner than you expected.

The CFPB has a list of questions to ask a housing counselor.

Shop around

• Compare the options, terms, and fees from various lenders. For example, while the mortgage insurance premium is usually the same from lender to lender, most loan costs — including origination fees, interest rates, closing costs, and servicing fees — vary among lenders.
• Confirm all upfront costs. Some reverse mortgages may be more expensive than traditional home loans, especially for things you pay upfront, like closing costs and origination fees. That’s important to consider if you plan to stay in your home for just a short time or to borrow a small amount.
• Know whether the offer is for a fixed or a variable interest rate. Most reverse mortgages have variable rates (that change depending on the market) and interest is added onto the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time. Reverse mortgages with variable rates tend to give you more options on how you get your money but you run the risk that the rate could go up.

Some reverse mortgages — mostly HECMs — offer fixed rates, but they tend to make you take your loan as a lump sum at closing. A fixed rate is generally good for you if you plan to use the reverse mortgage money all at one time, for instance, to pay off debt or do big home repairs. Often, the total amount you can borrow is less than you could get with a variable rate loan.

Learn More

Whether a reverse mortgage is right for you is a big question. Consider all your options. You might qualify for less costly alternatives. The following organizations have more information:

Consumer Financial Protection Bureau

Visit the CFPB’s reverse mortgage portal to view its informational video and get publications — Reverse Mortgages Discussion Guide and Considering a reverse mortgage? — that walk through some factors to keep in mind when thinking about getting a reverse mortgage.

To speak with someone at the CFPB, call 1-855- 411-CFPB (1-855-411-2372).

U. S. Department of Housing and Urban Development (HUD)’s Federal Housing Administration (FHA) Resource Center

Visit HECM Program or call 1-800-CALL-FHA (1-800-225-5342); TTY: 1-800-877-8339.

To find a HUD-approved housing counselor

Visit HUD’s site to search by counseling agency name or location or call 1-800-569-4287.

AARP Foundation

Visit their Reverse Mortgages Spotlight.

Your Right to Cancel

What if you’ve just gotten a reverse mortgage then change your mind? With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.”

To cancel

• You must notify the lender in writing within three business days (including Saturdays but NOT Sundays or legal public holidays).
• Send your letter by certified mail and get a return receipt. That will let you document what the lender got, and when.
• Keep copies of your letter and the supporting documents — including any letters you send to and get from the lender.

After you cancel, the security interest in your home is no longer valid, and you are not responsible for any amount for the credit. The lender has 20 days to return any money you’ve paid for the financing, and take actions needed to terminate the security interest on your home. If you got money or property from the creditor, you must offer to return it after they release your security interest and they return any money you paid.

Report Possible Fraud

If you suspect a scam, or that someone involved in the transaction may be breaking the law, let the counselor, lender, or loan servicer know. Then, report it to

• the FTC at ReportFraud.ftc.gov
• the Consumer Financial Protection Bureau
• your state attorney general
• your state banking regulatory agency