Reverse Mortgage Basics

A reverse mortgage is a type of home loan that allows homeowners age 62 and older to convert a portion of the equity in their home into cash. The borrower does not make payments on a reverse mortgage. Interest accrues on the reverse mortgage as long as the borrower lives in the home. Once the borrower dies or no longer lives in the home, then the borrower must repay the balance of the reverse mortgage and all accrued interest. A reverse mortgage is usually repaid by selling the house and applying the sales proceeds to payment of the reverse mortgage.   

There are 3 principal types of reverse mortgages: federally insured reserve mortgages which are known as Home Equity Conversion Mortgages (HECM); single purpose reverse mortgages offered by some state and local government agencies and some nonprofit organizations; and proprietary reverse mortgages offered by private companies. HECMs are the most common type of reverse mortgage and are the loans that most people are referring to when they mention reverse mortgages. 

Requirements for a reverse mortgage 

The basic requirements for a reverse mortgage are that the applicant: (1) is age 62 or older, (2) owns a home, (3) has either paid off all mortgages on the home or has a low balance remaining on a mortgage which can be paid off with the proceeds from the reverse mortgage, and (4) lives in the home. To qualify for a HECM reverse mortgage, the home must be either a single family residence or 1-4 unit building with 1 unit being occupied by the applicant.  The borrower does not have to satisfy an income requirement to qualify for a reverse mortgage. 

How much can a homeowner borrower with a reverse mortgage?

 The amount that a homeowner can borrower with a reverse mortgage depends upon the value of the home, the age of the youngest borrower, and the current interest rate. Generally, the greater the value of the home, the older the youngest buyer, and the lower the interest, the more a homeowner can borrow through a reverse mortgage. AARP provides an online calculator that is useful for estimating the amount that a homeowner can expect to receive from a reverse mortgage.

Homeowner’s payment options 

A homeowner has 5 options to choose from in determining how to receive the proceeds from a reverse mortgage. The homeowner can elect to receive fixed monthly payments for a defined term. If the homeowner is still living in the home when the term expires, the homeowners can still remain in the home and is not required to make payments on the reverse mortgage. 

The second option available to homeowners is the tenure option. Under the tenure option, the homeowner receives fixed monthly payments for as long as the homeowner lives in the house.  The third option for a homeowner is the line of credit option. Under this option, the homeowner has a line of credit which the homeowner may make withdrawals from until such time as the balance of the line of credit is exhausted.  The final 2 options are hybrid options which combine features of a line of credit with features of either the term option or the tenure option. 

A reverse mortgage can be an option for senior citizens with substantial equity in a home, but who find themselves needing additional income. Reverse mortgages are not for everyone. Interest rates and closing costs for reverse mortgages tend to be higher than those for regular mortgages. Additionally, even though a homeowner does not have to make principal and interest payments on the reverse mortgage while living in the home, the homeowner must continue to pay property taxes and insurance on the property. Therefore, the homeowner must make sure that he has sufficient income to pay taxes and insurance or the homeowner could still find himself facing a possible foreclosure.