Image of a couple discussing reverse mortgage options

Is a Reverse Mortgage right for you?

If the word “retirement” resonates with you, you’re not alone. Retirees are enjoying long-awaited travel pursuits, moves to places they’ve been dreaming of and finally being able to check things off their bucket lists. Some of them are paying for these endeavors by taking out a reverse mortgage, which allows certain homeowners to tap into their home equity in their golden years.

If you’ve reached the age of 62, you qualify for a reverse mortgage.

What is a reverse mortgage and how will it affect my kids?

A reverse mortgage is a loan that allows eligible homeowners (i.e., those 62 years and older) to pull equity from their homes, tax-free, in order to supplement retirement funds or offset cost-of-living expenses. Think of it as the flip side of a typical mortgage in which the borrower pays the lender; in this case, the lender pays the borrower, who is not required to pay back the loan as long as he/she is living there.

Typically, the borrower’s heirs use the proceeds from the sale of the home to pay off a reverse mortgage loan once the borrower moves or dies. There are no monthly payments, since the loan doesn’t come due until that time. 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 get (known as the principal limit) depends on several factors, including the current HECM mortgage limit, the home’s market value, current interest rates and your age. The reverse mortgage loan will usually not be for the full value of the home but rather a percentage, and any liens or existing mortgages on the home must be paid first.

You keep the title to the home, though as the loan matures, the home’s equity naturally goes down. As part of estate planning, borrowers and their families should make sure they understand how the proceeds from the sale of the home are to be disbursed upon the borrower’s death.

What are the requirements?

While there are no credit score or income requirements, for a primary homeowner to get a reverse mortgage they must:

  • Be 62 or older. If there are co-borrowers, this applies to the youngest borrower.
  • Have at least 50% equity in the home or own it outright.
  • Have no federal debt delinquency.
  • Attend a HUD-approved counseling session with a reverse mortgage counselor to ensure understanding of reverse mortgages and the financial risks.

For your property to be eligible, it must:

  • Be the primary residence.
  • Be in good condition.
  • Be a single-family home, HUD-approved condo, or a manufactured home built after June 1976.

After obtaining a reverse mortgage, you must:
• Keep the home in good condition.
• Remain current on homeowner’s insurance and continue to pay property taxes.

Are there costs I should know about?

It’s always important to know the fees and hidden costs before you get started. Expect to pay the following:

  • Upfront mortgage insurance premium of 2% and annual premium of 0.5%
  • Origination fees, which vary by lender but are typically 1 – 2% of loan amount
  • Servicing fees, which are capped at $30 or $35/month, depending on the type of interest rate
  • Other fees, such as the home inspection and appraisal
  • Closing costs
  • Interest

The good news is that many of these costs, including interest, can be rolled into the loan, though some people choose to pay out of pocket expenses and not finance them into the loan. For more insights, check out our article on understanding closing costs.

What about interest rates?

With a reverse mortgage, interest is not tax deductible until you pay it, and the deduction is capped at no more than $100,000 of the loan principal. Interest rates for reverse mortgages vary by lender and the type of payout you want.

Your options are:
• Fixed interest rate, which equates to a single, lump-sum payment
• Variable interest rate, which has historically been tied to the LIBOR rate. Note: As of December 31, 2021, LIBOR is no longer being updated and has been replaced with alternative rates such as the Secured Overnight Financing Rate (SOFR). Learn more about SOFR. Since you’re borrowing money over multiple years, the rate adjusts accordingly. Payment options include equal monthly payments, term payments, a line of credit, or a combination of these.

What are the pros and cons of a reverse mortgage?

First, the good news. There are many advantages of reverse mortgages including:

  • Access to cash that can help pay for living expenses and other large expenses such as healthcare
  • Ability to remain the homeowner and on the title
  • Flexible options for receiving and spending the loan funds
  • Potential for you or your heirs to receive the difference if the home’s value surpasses the loan balance
  • Non-borrowing spouse can remain in the home if the borrower dies

However, also consider some potential disadvantages like:

  • Decreasing home equity; increasing debt
  • Mortgage insurance premiums, closing costs and other servicing fees that can add up
  • If you choose not to make monthly mortgage payments, there’s an increasing principal loan balance
  • You must pay property taxes and homeowners insurance or risk the loan coming due.
  • If the loan balance surpasses the appraised value of the home, the lender may be able to take ownership of the home.
  • There are other ways home ownership could be at risk, especially if the borrower dies and the heirs do not want or are not able to pay off the loan balance.

Types of Reverse Mortgages

There are several types of reverse mortgages, with the most common being the federally insured Home Equity Conversion Mortgage (HECM). Administered through FHA-approved lenders, HECMs offer flexibility in how loan proceeds are used and received, requiring HUD-approved counseling.

Using Reverse Mortgages for Refinancing

You can use a reverse mortgage to refinance an existing mortgage but consider the high upfront costs. You must have lived in the home for at least 18 months since the original reverse mortgage closing to qualify.

Avoiding Reverse Mortgage Scams

To avoid scams, thoroughly research lenders and beware of pressure tactics from lenders and contractors. Veterans should note that the VA does not offer reverse mortgages. Exercise caution with family members or caregivers suggesting reverse mortgages for personal gain. Utilize the 3-day right of rescission to cancel a contract if needed. common real estate scams

Alternatives If You Don’t Qualify

Explore alternatives such as home equity line of credit, home equity lines of credit, personal loans, cash-out refinance, downsizing, or renting out part of your home to access funds if you don’t qualify for a reverse mortgage.

For those considering supplementing retirement income, consult with a lending expert to understand the implications of using home equity as security for a loan, ensuring informed decision-making for you and your family’s future.

©2002-2024 AmeriSave Mortgage Corporation® All Rights Reserved.
Communication Consent: By clicking the button, you are providing express consent for AmeriSave to call you (including through automated means; e.g. autodialing, text and pre-recorded messaging) via telephone, mobile device (including SMS and MMS) and/or email, even if your telephone number is currently listed on any internal, corporate, state, federal or national Do-Not-Call (DNC) list. You understand that you are not required to give consent as a condition of purchasing any goods or services.