A Reverse Mortgage Guide for Older Adult Homeowners

A reverse mortgage can enhance an aging adult's life going forward. For older homeowners with shrinking savings, reverse mortgages offer a low-risk source of extra income. To some, they are retirement tools to help ease the pressure from ongoing life expenses. This reverse mortgage guide will explain:

1. How reverse mortgages work
2. If you're a good candidate for a reverse mortgage
3. The benefits and 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.

A reverse mortgage can address these issues as a retirement investment. Perhaps you want to live a bit more comfortably later in retirement. 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, a reverse mortgage differs from a home equity line of credit (HELOC). Unlike other home equity loans, traditional mortgages, or second mortgages, you don't pay back the loan amount until you sell the home. The lender can give the loan proceeds to you in a single lump sum payment or as a series of monthly payments throughout your lifetime.

A loan servicer's 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, the lender may not disqualify you. But you must use the reverse loan to repay the other loan.

The three general types of reverse mortgages include:

1. Proprietary reverse mortgages
2. Single-purpose reverse mortgages
3. Federally insured reverse mortgages

In general, reverse mortgages do not have monthly mortgage payments.

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 die
• 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 is typically 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 get paid off when the house gets sold.

You can also have the loan paid in a lump sum, as monthly payments, or on your chosen schedule.

Benefits for Older Adult Homeowners

For older adult borrowers, reverse mortgages can be beneficial. This is because older borrowers generally:

1. Own their home (meaning they can borrow more against its value)
2. Have fewer sources and opportunities for income

Reverse mortgages can provide a line of credit that helps homeowners:

• Make necessary improvements (e.g., fixing a leaking roof)
• Provide income to help with paying bills or living expenses
• Give peace of mind knowing they will not lose their home

Reverse mortgages also offer a viable alternative to other ways to borrow money. Not everyone may be eligible for refinancing. Avoid expensive origination fees and other expensive costs that come with a new loan. A reverse mortgage allows you to put cash in your pockets without the hassle of monthly mortgage payments.

Do I Qualify for a Reverse Mortgage?

Private lenders do not have hard-and-fast qualifications for reverse mortgages, but they typically require borrowers to be 62 years old.

The ideal candidate for a reverse mortgage is someone who owns their home outright, has a high value, and is older. To a lender, ideal candidates for reverse mortgages have the highest reward and lowest risk.

This situation is attractive to lenders because:

1. The borrower has no creditors who have a claim on the home
2. The high property value of the house is a strong indicator that the lender will recoup all its money back
3. The lender is more likely to be repaid their loan sooner (based on actuarial charts)

Federal government lenders have a specific list of requirements.

Which Types of Homes Qualify for Reverse Mortgages?

Generally, all single-unit homes and homes with two to four units qualify for a reverse mortgage. In multi-unit homes, the owner or borrower must occupy one of the units.

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 house's value.

The most popular reverse mortgages are through the U.S. Department of Housing and Urban Development. As of 2024, its loan cap was $1,149,825 per home.

Mortgage Insurance for Reverse Mortgages

Most reverse mortgages require mortgage insurance. Borrowers pay mortgage insurance premiums to protect the lender's interest in their property. In the reverse mortgage context, insurance may cover the appraised value of a home so that a lender can recover its investment in case:

• The homeowner defaults on their obligations
• The property gets damaged, destroyed, or faces foreclosure

The government may insure some mortgage loans. The Federal Housing Administration (FHA) is part of the U.S. Department of Housing and Urban Development and insures 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.

But you don't have to worry about losing your home as long as you:

• Keep paying property taxes
• Maintain the home
• Retain homeowners insurance
• Honor all of the terms of your reverse mortgage agreement

How Will a Reverse Mortgage Affect My Heirs?

When you sell the home, there may be nothing left for you or your heirs.

If you wish to leave your home to your heirs, a reverse mortgage is not for you. Because the loan gets repaid out of proceeds from the home sale, there will be no home to pass down to your heirs.

But anything left over 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. Some scammers will purposefully target seniors. They will attempt to take advantage of older adults by making threats and pretending to hold positions of authority.

These lenders often charge high upfront servicing fees and high interest. They may try to prey on older adult homeowners who need cash to pay health care bills or necessary home improvements.

Types of Reverse Mortgage Lenders

Many lending institutions can offer you a reverse mortgage. The federal reverse mortgage program is popular because it charges no loan fees and has a low-to-moderate interest rate. But private lenders may be necessary for homeowners who can't qualify for a federal loan. Always be wary of any lender that charges loan fees.

Federal Government Lenders

The federal government is the most popular reverse mortgage lender. Through the U.S. Department of Housing and Urban Development (HUD), the government underwrites reverse mortgages to help older adult homeowners who wish to supplement their income.

The only reverse mortgage insured by the federal government is a Home Equity Conversion Mortgage (HECM).

Private Lenders

Private lenders often charge higher interest rates and add loan fees to reverse mortgages. This reduces the amount homeowners can draw from the equity in the home and increases their profits.

Some private lenders prey on 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 it is a government agency.

Getting a loan through a private lender can significantly increase the cost of the loan, but sometimes, it's the only option available.

Is a Reverse Mortgage Right for Me?

Reverse loans benefit older adult homeowners:

• With a large amount of home equity relative to their home's market value
• 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.

If you need more help, visit the Federal Housing Authority website. Sometimes, you can also use a power of attorney document to facilitate a reverse mortgage for an older adult.

An Attorney Can Give More Information

A real estate professional can do more than advise home buyers on closing costs. You might be worried about retirement if you have an existing mortgage and other expenses. Many older adults live on a fixed amount of money (such as Social Security) and could benefit from a financial assessment and counseling session. A real estate attorney can advise you about your eligibility for a reverse mortgage. They can help you explore different loan payment options and ensure you live comfortably in your golden years.