Reverse home mortgage loans are touted as an easy way for senior homeowners to access additional income. But before you apply for one, it’s vital to understand the ins and outs of reverse mortgages and the impact they will have on you and your heirs.
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How to Repay a Reverse Home Mortgage
Reverse Mortgage Example in 2024
What is a reverse home mortgage?
The definition of a reverse mortgage is a type of loan that allows borrowers to use the equity in their home as a security for the loan. Seniors who take out a reverse home mortgage loan do not make monthly mortgage payments while they live in the home. Most of these loans are regulated by the federal government.
How does a reverse mortgage work?
If you take out a reverse home mortgage loan, you do not have to pay back the loan principal as long as you live in the home. They are designed for seniors ages 62 and older to have a way to borrow against the equity they’ve built in their home to pay for living expenses.
Unlike a traditional mortgage, the balance of the loan increases overtime because the borrower is not making monthly payments. Each month, interest and fees are added to the loan balance owed when repayment is due.
The loan amount you can receive with a reverse mortgage depends on factors such as your age, your home’s value, and where your home is located.
Types of reverse home mortgages for seniors
While most of what we cover in this guide refers primarily to the most common type of reverse mortgage – Home Equity Conversion Mortgages (HECM) – there are a few other types. Each has its own features and considerations.
What is a Home Equity Conversion Mortgage (HECM)?
HECM loans are backed by the U.S. Department of Housing and Urban Development (HUD). They are the most popular kind of reverse mortgage because of their flexibility: they don’t have medical or income requirements or restrictions on how the proceeds can be used.
There are various ways you can receive your HECM payments, and the amount you can borrow from the lender depends on things like your age and amount of equity.
What is a Proprietary (Jumbo) Reverse Mortgage?
Proprietary reverse mortgages are given by private lenders, and therefore they aren’t federally insured. Homeowners who want higher payments and have homes with higher values might choose one of these, as the lending limits tend to be much higher than those set for HECMs.
Costs for a proprietary reverse mortgage can vary greatly because of interest rates and mortgage insurance requirements, so it’s a good idea to compare them with your HECM options as well.
What is a Single-Use Reverse Mortgage?
This is the least common type of reverse mortgage, and loan proceeds are restricted to being used for a specific purpose approved by the lender – usually home repairs or property taxes. They are backed by local, state, or nonprofit agencies and tend to be less expensive. They aren’t available in all states, so you may not be able to access one near you.
Do you have to pay property taxes with a reverse home mortgage?
Yes, the homeowner remains responsible for paying things like property taxes, insurance, and repairs even with a reverse mortgage. If they don’t, the lender may use the loan to make payments for you – or they could call the loan due in full.
When does a reverse mortgage get repaid?
A reverse mortgage is due to be repaid once the borrower is no longer living in the house or fails to meet the requirements of their loan contract. This could be for reasons such as:
The home is sold
The borrower passes away
The borrower goes 12 months without living in the home
The property is not adequately maintained
Property taxes or home insurance payments are not paid
If a reverse mortgage borrower’s spouse outlives them, the spouse may have additional options and leeway to keep living in the home after the borrower dies. It’s important to get clarification from your lender ahead of time if this is a potential outcome.
How does a reverse mortgage get repaid?
Typically, the lender retrieves the loan balance (including accrued interest) from the sale of the home. When the borrower passes away or leaves, the home is sold and the loan is repaid. The remaining proceeds from the sale go to the borrower or their heirs.
With federally-insured reverse mortgages, heirs are protected from having to pay more than the home’s value upon repayment. The debt due will be either the mortgage balance or 95% of the home’s appraised value – whichever is less.
How does a reverse mortgage impact heirs?
Inheriting a house with a reverse mortgage can be complicated. When a reverse mortgage borrower passes away, their heirs are presented with a few different options for the property:
Buy the Home Heirs can purchase the home for the amount of the reverse mortgage loan balance. If the balance is greater than the worth of the home, they can buy it for 95% of its market value.
Sell the Home Heirs can put the home on the open market to sell. After the reverse mortgage is repaid, they will keep the remaining profits.
Walk Away Heirs can forego the home sale process, submitting a deed in lieu of foreclosure. They won’t incur any debt, but they also won’t receive any proceeds. This option is usually only chosen when the balance of the mortgage is greater than the property’s value.
When do borrowers receive funds from a reverse mortgage loan?
Reverse mortgages with adjustable interest rates have several payment options available to you as a borrower:
“Tenure” monthly payments for as long as you live in the home
“Term” monthly payments for a selected number of months
A line of credit that allows you to decide how much you borrow and when until it’s depleted
There are also modified term and tenure options that combine monthly payments with a line of credit. Your reverse mortgage counselor and lender should outline your available options.
Reverse home mortgages with fixed interest rates, however, will receive payment in a lump sum.
What are reverse mortgage interest rates?
Reverse mortgage interest rates can be variable or fixed. Interest rates affect how quickly the loan balance grows and, ultimately, how much borrowers or heirs will owe. Often, a reverse home mortgage will have a higher interest rate than a traditional mortgage.
Fixed Interest Rates
Fixed interest rates for reverse mortgages are usually limited to lump-sum loans when using an HECM. These rates remain the same for the life of the loan, so it’s easier to predict how much will accrue over time. However, reverse mortgages with a fixed rate are usually restricted to a lump-sum payout.
Variable Interest Rates
Variable interest rates change over time based on a specific benchmark or index. When the benchmark changes, the interest rate adjusts as well. Variable interest rates are often preferred because they offer more payment options (credit line, monthly installments, etc.) and you can typically take out more money over the life of the loan.
Maximum Lifetime Rate
There are limits to how much a variable interest rate can increase over the life of the loan. This “cap” is called the maximum lifetime rate, and is usually several percent higher than the original rate. This can protect borrowers from steep interest rate increases.
The maximum lifetime rate is an important factor to consider when considering what type of reverse mortgage to pursue. A higher cap means the loan balance can grow more quickly if rates increase significantly, reducing the equity available to the borrower or their heirs.
Interest accrues and is not due until the borrower has to repay the balance of the loan. Not every reverse mortgage lender offers the same interest rate or maximum lifetime rate. Get quotes from several of the best reverse mortgage companies before deciding on one.
What age must you be to qualify for a reverse mortgage?
For the most common types of reverse home mortgages, borrowers must be 62 or older.
For those 55 and older, there are some private reverse mortgage programs (or “jumbo” reverse mortgages) that may be available. These can have significantly higher lending limits than the typical HECM loans but aren’t always an option.
Are reverse mortgages a good idea?
Reverse mortgages can be a helpful tool for seniors who need an income boost to pay their living expenses or want to diversify their income in retirement.
However, reverse mortgages tend to be expensive in the long run and can affect those who share or inherit the property. It’s vital to consider the pros and cons of a reverse home mortgage before diving in. (Skip down to those here.)
There are some protections you have when you acquire a reverse home mortgage. Government-backed loans like HECM ensure that your heirs won’t end up owing more than the home’s value when it’s sold. After closing on a reverse mortgage, you have three days to cancel for any reason without penalty.
What are the requirements for a reverse mortgage?
To qualify as a borrower for an HECM reverse mortgage loan, you must:
Be 62 or older
Own your home or have at least 50% equity
Live in that home for most of the year
Complete reverse mortgage counseling (more on that later)
Also, your home must be one of the following:
A single-family home
A 2-4 unit home that you live in
An HUD-approved condominium project
A manufactured home or single condo unit that meets FHA requirements
What are my responsibilities if I have a reverse home mortgage?
If you take out an HECM reverse mortgage loan, you must:
Continue living in the home (if you move out for more than a year, you have to repay it)
Pay off any existing mortgage on the home using reverse mortgage proceeds so that the reverse mortgage is the primary lien
Continue paying property taxes and home insurance with a reverse home mortgage
Keep the home in good repair
What is reverse mortgage counseling?
If you seek an HECM loan, you’ll be required by HUD to complete approved reverse mortgage counseling. Sessions take at least 90 minutes and typically cost between $125-$200 USD.
Reverse home mortgage counseling is an important step in the process, because it’s essential that borrowers understand the pros and cons of reverse mortgages, the risks and the responsibilities. These sessions help seniors get informed about reverse mortgages and what other financing alternatives might be available for their needs.
What are the costs of a reverse home mortgage?
In addition to the loan principal and accrued interest, reverse mortgages have closing costs and fees just like a typical mortgage or refinance. These include things like:
Origination fee
Initial mortgage insurance premium - paid up front, fixed at 2% of the home’s appraised value
Annual insurance premium – 0.5% of outstanding loan balance
Homeowners insurance
Title and report insurance
Title search
Flood certification fee
Loan servicing fees
Federally-backed HECM loans have limits on how much lenders can charge for certain fees, like servicing and origination fees.
Remember, homeowners are still responsible for paying for property taxes and home maintenance even when they have a reverse mortgage.
What are the pros and cons of reverse home mortgages?
HECM loans and reverse mortgages can be a very helpful solution for seniors who need financial assistance. However, they aren’t always the most financially responsible option and they aren’t for everyone. Let’s look at the pros and cons of reverse mortgages:
Reverse Mortgage Pros:
You don’t have monthly mortgage payments
You don’t have to move out of your home
Your heirs won’t owe money on the loan if it’s more than the property is worth
Payment options are available in installments or lump sums
Loan proceeds are non-taxable
You can get additional income for living or medical expenses
They don’t have the income or credit history requirements other loans have
They don’t require significant savings
Reverse Mortgage Cons:
They require a certain amount of equity
They have high fees and costs
You lose equity in your home
They could prevent your heirs from inheriting your home
They could affect Medicaid benefits
You can’t go 12 months or more without living in the home, even for medical reasons
Your funds could run out
Your home must be continually maintained and insured
How Much Can I Borrow with a Reverse Mortgage?
The 2024 HUD Maximum Claim Amount for HECM reverse mortgages is $1,149,825. That said, you might not qualify for that amount.
The Maximum Claim Amount is a factor used to determine your Principal Limit. Other factors used to calculate this are your age, interest rates, and home value. Lenders will assist you with calculating your exact Principal Limit before you sign onto a reverse mortgage loan.
You cannot get 100% of the value of your home through a reverse mortgage. To find out exactly how much you would qualify for, speak with a reverse mortgage lender.
Reverse Mortgage Example in 2024
Bill and Vicky live in Virginia Beach, Virginia, where they both retired at 65 in their fully owned ranch home. Now, due to some medical and family expenses, they find they need some additional income. They decide to explore reverse mortgage options.
Bill (69) prefers to go with a HUD-backed HECM loan, which will protect his daughter from owing any debt from the loan if he and Vicky pass away. He also likes the idea of a line-of-credit loan, which will come with a variable interest rate.
Because their home is valued at $600,000.00, Bill is eligible for a line of credit at $230,000.00 through a reverse mortgage loan.
They can get an initial interest rate of 6.87%, which will have a maximum lifetime interest rate of 11.87%. They make sure their homeowners insurance will continue and make plans to pay for that and property taxes each month, as required by the loan.
At closing, Bill and Vicky would have to pull about $4,000 out of their savings to cover closing costs and loan fees. They decide to take out the loan in Bill’s name, with Vicky being a “non-borrowing spouse.”
Bill takes an initial payout of $30,000 to pay off their current medical bills. Then, he decides to pull out $12,000 each year to supplement their income.
If Bill passes away, Vicky (66) will be eligible to continue living in the house without repaying the reverse mortgage because she was married to Bill when he closed on the loan. She does need to continue living in the house, paying property taxes, and maintaining the property so the loan is not called in.
After 15 years, both Vicky and Bill have passed away and their daughter, Sandra, inherits the home. Sandra orders an appraisal and discovers the home is now worth $875,000.00. She knows from the most recent reverse mortgage statement that her parents' loan balance is $396,822.
Sandra could pay off the loan and keep the home, but as she has her own home in another state, she decides to sell it. She sells the home on the open market and uses that money to pay off the balance of the reverse mortgage. After taxes, commissions, and fees, Sandra can keep the proceeds of just over $400,000 from the sale.
What are some alternatives to reverse home mortgages?
In an ideal world, having enough retirement savings or investments would allow each of us to live comfortably in retirement. However, that’s simply not always the case.
Adapting your lifestyle to a tighter budget or downsizing to a more affordable and manageable home could be a lower-stress option for you in the long run. If you want your house to go to family members, consider selling it to them rather than willing it to them and either downsizing then or renting it from them.
When considering a reverse mortgage, also explore your eligibility for other traditional mortgage and refinancing options that might give you better interest rates and terms.
The Bottom Line
Though they can be a helpful resource for seniors who truly need additional income, reverse mortgages can be expensive and complicated. They remove your equity from your home and can impact your beneficiaries’ ability to inherit the home.
When considering taking out a reverse mortgage, make sure you know the ins and outs of the process as described in our complete guide to reverse mortgages.
If you’ve inherited a home with a reverse mortgage or wish to get out of a reverse mortgage loan, contact our team of experts for a free 15-minute consultation.