A "reverse mortgage" is a type of financing option that allows homeowners to borrow against the value of their house and may be a good option for certain homeowners. But unlike a home equity loan, in which the borrower must make payments on a regular basis, a reverse mortgage only needs to be paid back after the homeowner dies or sells the house. This type of mortgage is especially useful for older homeowners who need cash for things such as paying off the current mortgage or paying for increasing health care expenses, but it often means they lose that asset after their death if they don't otherwise pay back the loan and can't offer it in a will. FindLaw's Reverse Mortgages section provides a general overview and some practical tips.
How a Reverse Mortgage Works: The Basics
In order to qualify for a reverse mortgage, in most cases, you must be at least 62 years old and live in your home. The borrower generally does not have to pay taxes on the monthly payments, while many of them do not have income restrictions. The lender, meanwhile, is repaid when the borrower dies (hence the age restrictions), sell the home, or move somewhere else. It's a great option for older homeowners on a fixed income who are having difficulty making ends meet, with the understanding that they most likely will not have the option of passing it onto loved ones in a will.
Therefore, the reverse mortgage is best positioned for those who are cash-poor but house-rich. While the loans are typically repaid with the proceeds of the home, borrowers who are able to repay the loan may keep their home. But beware of unscrupulous lenders trying to take advantage of unsuspecting homeowners -- the lender is in business to make money, after all.
Types of Reverse Mortgages
There are three main types of reverse mortgages, each with its own advantages and disadvantages: single-purpose; federally-insured; and proprietary. The type of reverse mortgage you get will depend on such factors as age, home value, where you live, and how much cash you have for upfront costs.
- Single-Purpose Reverse Mortgage - These tend to be the lowest-cost option, but are not available everywhere and may be used for one specific purpose (such as property taxes or home improvements); generally intended for low-income homeowners.
- Home Equity Conversion Mortgage (HECM) - These have high upfront costs but are backed by the U.S. Department of Housing and Urban Development (HUD); they are widely available and can be used for any purpose.
- Proprietary Reverse Mortgage - These are private loans, typically costing more than HECMs but a better option for higher-valued homes.
How to Get a Good Deal on a Reverse Mortgage
If you are in the market for a reverse mortgage, or at least kicking the tires, make sure you learn as much about them as possible so you can ask informed questions when talking to loan officers. There is a wide variance among the different types of reverse mortgages and lenders. The following considerations will help you decide on the right reverse mortgage for your needs:
- All HECM lenders must follow HUD rules, so certain loan costs (such as interest) are the same no matter which lender you choose.
- Proprietary reverse mortgages allow you to borrow more money and are a good option for those with particularly high-valued homes, but they also cost more upfront.
- Have the lender explain the Total Annual Loan Cost (TALC) rates.
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