How Reverse Mortgage Loans Work

You may have seen advertisements from reverse mortgage lenders on TV. Unlike a traditional mortgage, a reverse mortgage is a type of loan where you:

• Retain title to your primary residence
• No longer make monthly mortgage payments
• Receive a monthly stream of income from the equity in your home

There are three basic types of reverse mortgage loans:

• Proprietary
• Single-purpose
• Federally insured

This article provides an overview of how reverse mortgages work. It discusses what reverse mortgage borrowers should look out for while weighing their options.

Reverse Mortgages as a Popular Choice for Seniors

Reverse mortgages are often marketed to older adults. A Home Equity Conversion Mortgage (HECM) program may be ideal for you if you are considering relocation to a home for older adults. Regulated by the U.S. Department of Housing and Urban Development (HUD), HECM programs allow borrowers to live in long-term care units or other medical facilities for up to 12 months before the loan becomes payable.

Repayment of a Reverse Mortgage

The reverse mortgage loan amount you borrow must be repaid when:

• The last surviving borrower dies
• The home is sold
• The home is no longer used as a principal residence
• You violate any mortgage terms, such as your obligation to continue paying property taxes and insurance

If one of the above has occurred, consult with an expert to go over your payment options. If you default on your reverse mortgage obligations, your credit score may decrease. The same is true for any other existing mortgage that may affect your property.

The Cost of Getting a Reverse Mortgage

Lenders generally charge origination fees and other closing costs for a reverse mortgage. Lenders may charge servicing fees during the mortgage term. The lender sets these fees and costs. The income you receive from a reverse mortgage is considered a loan proceed, and thus, it is not taxable.

Reverse Mortgage Liens

Any mortgage, including a reverse mortgage, will feature a lien. A lien is a security interest against your home to protect the lender. A lien against your home gives the loan issuer the right to foreclose on your residence if you fail to honor the terms of your mortgage. A lien continues to encumber your property until you pay off the mortgage. Once the lien is paid off, foreclosure will no longer be a concern. In the case of a reverse mortgage, the balance may not be paid off until you pass away and your home is sold.

Loan Counseling and Scam Avoidance

As you consider a reverse mortgage, be aware that resources are available to help educate you. Regardless of financial circumstance, you will need to undergo a loan counseling session. The session may provide a financial assessment of the impact of a reverse mortgage. It will also aim to:

• Verify that you understand what a reverse mortgage loan is
• Explain the terms and conditions of your reverse mortgage loan

In recent years, there has been an increase in the incidence of reverse mortgage scams. Scammers might offer to get you a larger amount of money through a refinance or credit card offer. If you believe you have become the victim of such a scam, it is important to report this to the Consumer Financial Protection Bureau (CFPB).

How Reverse Mortgage Interest Rates Work

Reverse mortgages may have fixed rates or variable rates. Most have variable rates tied to a financial index and will likely change according to market conditions. The amount you owe on a reverse mortgage (the mortgage balance) generally grows over time.

Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total loan balance increases over time as loan funds are advanced to you and interest accrues on the loan. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Property Tax and Insurance

Because you retain title to your home, you remain responsible for:

• Property taxes
• The insurance policy on your home
• Utilities, fuel, maintenance, and other expenses

So, for example, if you don't pay property taxes or maintain homeowner's insurance, you risk the loan becoming due and payable.

Nonrecourse Clauses

Reverse mortgages can use up all or some of the equity in your home, leaving fewer assets for you and your heirs. A "nonrecourse" clause, found in most reverse mortgages, prevents you or your estate from owing more than home's value when the loan is repaid. That means if you received more income in your lifetime than there was equity left in your home, a lender will not be able to obtain the balance owed by coming after your estate after you pass away.

Proprietary Reverse Mortgage Loans

Backed by private lenders, proprietary reverse mortgage loans tend to benefit wealthier homeowners. If the appraised value of your home is greater than $1.15 million, the limit on lending set by HUD as of 2024, you may qualify for such a reverse mortgage. With a proprietary reverse mortgage, you may receive one lump sum payment or a series of monthly payments. While this level of flexibility in disbursement makes this variety of reverse mortgages attractive, these loans also do not require upfront or mortgage insurance premiums (MIPs).

Single-Purpose Reverse Mortgages

Offered by state, local, and nonprofit agencies, single-purpose reverse mortgages are the least expensive variety of reverse mortgages. They are not available in every state, and far more restrictions are in place concerning how you may use them. As the name of the loan would suggest, they may be used for only one purpose.

Unlike home equity loans or home equity lines of credit (HELOCs), which require monthly payments, these loans do not need to be repaid until:

• Ownership of your home changes
• The reverse mortgage borrower dies
• The borrower moves to a different residence

Federally Insured Reverse Mortgages

Federally insured reverse mortgages tend to be the most widely used of the three varieties of reverse mortgage loans. As mentioned above, HECM loans are backed by HUD and insured by the Federal Housing Administration (FHA). While they are more expensive than traditional home loans in terms of higher upfront costs, they carry no income restrictions or medical requirements. HUD-approved HECM loans may still appeal far more to you because they can be used for any purpose, such as living expenses, home repairs, or health care costs.

How a Lawyer Can Help

It is best to consult a reverse mortgage expert who can advise you on current interest rates and eligibility. If you are considering a reverse mortgage loan, reach out to a real estate attorney. A real estate lawyer can provide reverse mortgage counseling and help you resolve any issues you encounter along the way.