Is a Reverse Mortgage Right for You?

Ah, retirement: Time to travel, relax, and finally check some things off your bucket list. For homeowners aged 62 and older, a reverse mortgage is a way to tap into your home equity and fund the retirement you’ve been working toward. Learn how a reverse mortgage works, the pros and cons, and what you need to qualify. 

What is a reverse mortgage?

A reverse mortgage is a loan that allows you to access your home equity, tax-free, as long as you are 62 or older and meet other requirements. You can use reverse mortgage funds to supplement your retirement income or to offset cost-of-living expenses. Think of it as the flip side of a typical mortgage, where the borrower pays the lender. Instead, the lender pays you, and you don’t have to pay back the loan as long as you’re living in the home.   

Typically, your heirs will use the proceeds from the sale of the home to pay off the reverse mortgage loan after your passing. That means there are no monthly payments to make, since the loan doesn’t come due until then. And because most reverse mortgages are federally regulated, they are non-recourse, meaning neither the borrower nor their heirs are required to pay back more than the sale price of the home. 

How does a reverse mortgage work?

The amount you can borrow (known as the principal limit) depends on several factors, including the current HECM mortgage limit, your home’s market value, current interest rates, and your age. The loan will usually not be for the full value of your home but rather a percentage. Any liens or existing mortgages on the home must be paid first. 

After closing on your reverse mortgage, you can typically choose between receiving equal monthly payments, payments across a fixed term, drawing on a line of credit, taking a lump sum, or a combination of these. 

You’ll still own your home, but as the loan balance grows, your home equity will decrease. That’s why it’s important for you and your family to have a plan in place for when the loan comes due. 

Types of reverse mortgages

There are several types of reverse mortgages, which differ based on your income, location, and loan purpose: 

• Home Equity Conversion mortgage (HECM): A Home Equity Conversion Mortgage offers flexibility in how you use the loan proceeds. To get a HECM, you’ll need to go through FHA-approved lenders and complete HUD-approved counseling. 

• Single-purpose reverse mortgage: You may be able to find a reverse mortgage through local government or non-profit organizations. These reverse mortgages are only available for a single, specified purpose, such as home renovations, and are not federally insured. 

• Jumbo or proprietary reverse mortgage: This type of reverse mortgage isn’t insured by the FHA, either. It’s usually designed to help homeowners with hefty home values. You’ll go through a bank or lender to find this kind of loan. 

Reverse mortgage expenses

Reverse mortgages have fees and costs you should know about before you get started. Expect to pay the following: 

• Mortgage insurance: Upfront premium of 2% and annual premium of 0.5% of the loan amount. 

• Origination fees: Vary by lender but are typically 1% – 2% of the loan amount, paid upfront. 

• Servicing fees: Capped at $30 or $35 per month, depending on the type of interest rate. 

• Other fees: These include the home inspection and appraisal fees. 

• Closing costs: Can be about 3% to 5% of the loan amount. 

• Interest: These may be fixed or variable. Rates vary by lender and program. 

Some of the costs associated with your reverse mortgage will be due upfront, but you may have the option to roll them into the loan. That includes your mortgage insurance premiums, origination fees, and closing costs. 

Reverse mortgage pros and cons

This type of loan can have many advantages, especially for older homeowners with a lot of equity, but there are drawbacks. Understanding reverse mortgage pros and cons will help you decide if this is the best route for your retirement needs. 

Pros

• Get access to tax-free cash for living expenses. 

• Own your home and continue living there as long as you want. 

• Protect your spouse’s ability to stay in the home after your death. 

• Choose the funding and repayment method that works best for you. 

• Your heirs can sell the home to repay the loan. 

Cons

• Your home equity will decrease. 

• You’ll need to pay loan costs and fees, plus interest. 

• Your loan balance will increase over time. 

• You’re still responsible for property taxes and homeowners insurance. 

• The loan will come due once you die or move out. 

Do you qualify for a reverse mortgage?

While there are no credit score or income requirements, you will need to meet other criteria: 

• Age: Be 62 or older. If there are co-borrowers, this applies to the youngest borrower. 

• Equity: Have at least 50% equity in the home or own it outright. 

• Credit: Have no federal debt delinquency. 

• Counseling: Attend a HUD-approved counseling session with a reverse mortgage counselor to ensure an understanding of reverse mortgages and the financial risks. 

Your property must also meet certain criteria: 

• Occupancy: The home must be your primary residence. 

• Condition: The home must be in good condition. 

• Type: It must be a single-family home, HUD-approved condo, or a manufactured home built after June 1976.  

After obtaining a reverse mortgage, you must: 

• Keep your home in good condition. 

• Remain current on homeowners insurance and continue to pay property taxes. 

Explore your alternatives

If a reverse mortgage isn’t the right fit or you don’t qualify, there are other ways to supplement your retirement income. You might consider options that maintain your home equity rather than reduce it: 

• Home equity line of credit (HELOC): Withdraw funds up to a set limit, only paying interest on what you use.  

• Home equity loan: Receive a lump sum upfront and pay it back in monthly installments. 

• Cash-out refinance: Replace your mortgage with a new, larger loan and take the difference in cash.  

The right option for you will depend on how much equity you have, what rates you can qualify for, and what repayment terms you want. AmeriSave can help you find the right equity tool for your situation. Start exploring your options with a free quote.  

FAQ

What is a reverse mortgage example?

Here’s how a reverse mortgage works: Suppose you own your home free and clear, and it’s valued at $500,000. You take out a reverse mortgage for 50% of the value, or $250,000, receiving the funds in a lump sum. Interest will accrue on the $250,000 loan balance monthly until it’s repaid. If your interest rate is 10% and you keep the reverse mortgage for 10 years, you’d owe $676,760 by year 10. Ideally, the home will have appreciated over those 10 years, allowing you to repay the loan by selling the home.

How does a reverse mortgage affect my heirs?

It’s common that your heirs will have to sell the home to repay the reverse mortgage. If you intend to leave the home to your heirs, then a reverse mortgage may not be the right solution for supplementing your retirement income. 

How do reverse mortgages affect government benefits?

A reverse mortgage does not affect your government benefits, because it’s money you receive by tapping an asset you already own. The income is tax-free for that reason, too.