A reverse mortgage is a type of loan that is used by homeowners at least 62 years old who have considerable equity in their homes. By borrowing against their equity, seniors get access to cash to pay for cost-of-living expenses late in life, often after they’ve run out of other savings or sources of income. In a conventional mortgage, a person takes out a loan in order to buy a home and then repays the lender over time. In a reverse mortgage, the person already owns the home, and they borrow against it, getting a loan from a lender that they may not necessarily ever repay. In the end, most reverse mortgage loans are not repaid by the borrower. The process of using a reverse mortgage is fairly simple: It starts with a borrower who already owns a house. The borrower either has considerable equity in their home (usually at least 50% of the home’s value) or has paid off their mortgage entirely. The borrower then applies for a reverse mortgage, which is a loan that is secured by the equity in their home. The lender will then evaluate the borrower’s creditworthiness and the value of the home to determine how much money they can lend. The borrower can then choose to receive the money in a lump sum, as a line of credit, or in monthly payments. The borrower does not have to make any payments on the loan while they are still living in the home. Instead, the interest on the loan is added to the balance of the loan each month. When the borrower dies or moves out of the home, the loan must be repaid. This is usually done by selling the home, but the borrower’s heirs can also choose to repay the loan and keep the home12
The pros and cons of reverse mortgages
- You can better manage expenses during retirement. Once you retire, your income may substantially decrease.
- You can stay in your home. You can use the money from a reverse mortgage to pay off your existing mortgage, which can help you avoid foreclosure and stay in your home.
- You can use the money for anything. There are no restrictions on how you can use the money from a reverse mortgage.
- You can receive the money in a variety of ways. You can receive the money in a lump sum, as a line of credit, or in monthly payments.
- You don’t have to make any payments on the loan while you are still living in the home. Instead, the interest on the loan is added to the balance of the loan each month.
- Your loan gets bigger over time. Unlike regular mortgages, the loan balance on a reverse mortgage goes up the longer you have it.
- You could lose your home to foreclosure. In order to qualify for a reverse mortgage, you have to be able to afford your property taxes, homeowners insurance, and other expenses associated with owning a home.
- Your heirs could inherit less. When you die, your heirs will have to pay off the loan if they want to keep the home. If the loan balance is greater than the value of the home, they may have to sell the home to pay off the loan.
- It’s not free. There are fees associated with taking out a reverse mortgage, including origination fees, closing costs, and mortgage insurance premiums.
- It could impact your other retirement benefits. The money you receive from a reverse mortgage could impact your eligibility for other government benefits, such as Medicaid1234
Eligibility requirements for reverse mortgages
- You must be at least 62 years old.
- You must own a significant amount of equity in your home. While the specific percentage of equity required varies across lenders, typically you’ll need at least 50%1.
- You must live in the home as your primary residence.
- You must have sufficient home equity.
- You must meet financial eligibility criteria as established by HUD2.