A Reverse Mortgage Guide for Older Adult Homeowners
For older homeowners with shrinking savings, reverse mortgages offer a low-risk source of extra income. This reverse mortgage guide will explain if you're a good candidate for a reverse mortgage, how reverse mortgages work, and the risks involved.
As you get older, your income level usually tapers off. Your income and savings may not be enough to cover your bills. The added costs of paying for needed home improvements, or medical issues your insurance won't cover, can be devastating.
Or perhaps you want to live a bit more comfortably later. If you own a substantial amount of equity in your home, a reverse mortgage may be an option for you to turn the equity into cash.
What Is a Reverse Mortgage?
A reverse mortgage loan is a home loan that allows homeowners to convert part of the equity in the home into cash. You get money based on your loan balance or equity. But unlike other home equity loans, traditional mortgages, or second mortgages, you don't pay back the loan until you sell the home.
The only requirements for most reverse mortgages are:
- The home is your principal residence
- The reverse loan must be the primary repayment (first to be paid back) loan on the home
If you have a home loan currently, you're not necessarily disqualified. However, you must use the reverse loan to repay the other loan.
Reverse Loans: After Death or Changes To Living Situations
You and your co-borrower (if there is one) have to repay the amount borrowed (plus interest) when:
- You pass away
- Sell the house
- No longer use it as your primary residence
You must also continue paying property taxes and maintaining homeowners insurance. If you fail to do either, the loan will typically be due immediately.
What Are the Benefits of a Reverse Mortgage?
The main benefits of a reverse mortgage are:
- You can maintain ownership of your home as long as you live in it
- You can receive an immediate influx of cash
The lender can't take your home away for missing a mortgage payment because there are no monthly payments to miss. With this type of loan, the entire loan, interest, and loan fees) are paid off when the house is sold.
Additionally, you can have the loan paid in a lump sum, as monthly payments, or on a schedule of your choosing.
Benefits for Older Adult Homeowners
For older adult borrowers, reverse mortgages can be beneficial. This is because older borrowers generally:
- Own their home (meaning they can borrow more against its value)
- Have fewer sources and opportunities for income
Reverse mortgages can provide a line of credit that assists homeowners in:
- Making necessary improvements (e.g., fixing a leaking roof)
- Providing income to help with paying bills or living expenses
- Giving peace of mind knowing they will not lose their home
Do I Qualify for a Reverse Mortgage?
There are no hard and fast qualifications for reverse mortgages from private lenders. They typically require borrowers to be 62 years old.
The ideal candidate for a reverse mortgage is someone who owns their home outright, the value of the home is high, and they are older. To a lender, ideal candidates for reverse mortgages have the highest reward and lowest risk.
This situation is attractive to lenders because:
- The borrower has no creditors who have a claim on the home
- The high property value of the house is a strong indicator that the lender will recoup all of its money back
- The lender is more likely to be repaid their loan sooner (based on actuarial charts)
Federal government lenders, however, have a specific list of requirements.
Which Types of Homes Qualify for Reverse Mortgages?
Generally, all single-unit homes and homes with 2-4 units qualify for a reverse mortgage. In multi-unit homes, one of the units must be occupied by the borrower or owner.
Specific lenders also allow condominiums.
The federal government will back a reverse mortgage for certain manufactured homes, but lenders do not typically grant reverse mortgages for mobile homes.
How Much Can I Borrow?
The amount you can get on your reverse mortgage depends on factors such as:
- Your age
- Current interest rates
- The value of your home
Older adults generally get lower interest rates and will be able to borrow more against the value of the house.
The most popular reverse mortgages are through the U.S. Department of Housing and Urban Development. Their loan has a cap of $970,800 per home as of January 1, 2022.
Mortgage Insurance for Reverse Mortgages
The Federal Housing Administration (FHA) is a part of the U.S. Department of Housing and Urban Development. They insure mortgage loans from FHA-approved lenders.
What Are the Disadvantages of Reverse Mortgages?
The biggest drawback of a reverse mortgage is that the debt and interest rise each time you borrow. The new amount and interest are capitalized onto the old debt. So, the amount you owe can quickly reach as high as the home's value.
However, you don't have to worry about losing your home as long as you:
- Keep paying property taxes
- Maintain the home
- Retain homeowners insurance
However, when you sell the home, there may not be anything left for you or your heirs from the sale.
If you wish to leave your home to your heirs, a reverse mortgage is not for you. Because the loan is repaid out of proceeds from the home sale, there will be no home to pass down to your heirs.
However, anything leftover from the sale, after paying back the loan, is yours. Sometimes it will belong to your estate. Either way, you can gift it as you choose.
Aggressive Lenders and Loan Scams
Borrowers should be wary of aggressive lenders who claim to be from government agencies.
These lenders often charge high fees and high interest. They may attempt to prey on older adult homeowners who need cash to pay healthcare bills, supplement Medicare or Medicare or other income, and pay for necessary home improvements.
Types of Reverse Mortgage Lenders
The federal reverse mortgage program is popular because it charges no loan fees and has a low to moderate interest rate.
However, private lenders may be necessary for homeowners who cannot qualify for a federal loan. Always be wary of any lender that charges loan fees.
Federal Government Lenders
The most popular reverse mortgage lender is the federal government. Through the U.S. Department of Housing and Urban Development (HUD), the government underwrites reverse mortgages to assist older adult homeowners who wish to supplement their income.
The only reverse mortgage currently insured by the federal government is a Home Equity Conversion Mortgage (HECM).
Private lenders often charge higher interest rates and tack on loan fees to the reverse mortgage. By doing so, they reduce the amount homeowners can draw from the equity in the home and increase their profits.
Some private lenders prey upon older adult homeowners by presenting themselves as government agencies. They may send official-looking documents in the mail.
Be aware that HUD-backed reverse mortgages will not charge loan fees. If you're unsure, directly ask the lender if they are a government agency.
Getting a loan through a private lender can significantly add to the cost of the loan, but sometimes they are the only option available to you.
Is a Reverse Mortgage Right for Me?
Reverse loans benefit older adult homeowners:
- With a substantial home equity
- Who wish to stay in their own home for a long time
When researched correctly and for the right people, the advantages of a reserve mortgage can outweigh any potential drawbacks.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.