How Does a Reverse Mortgage Work?

A reverse mortgage offers a number of benefits, especially for retiree homeowners who need additional income—but it does have downsides to consider.

Let’s look at how reverse mortgages work, about the different types of reverse mortgages, and whether this type of loan may be right for you.

How a Reverse Mortgage Works

A reverse mortgage allows you to access the equity in your property if you're age 62 or older. You can use that money for any purpose, such as toward retirement living expenses or to pay health care costs. Unlike other home equity loans, these mortgages don’t require repayment until you die or sell the home.

A reverse mortgage provides you with money based on the equity you have in your property and other factors. This way, you can access your home equity without refinancing or selling your property. To qualify, you must be 62 or older.

You can receive your money in one of three ways: as a line of credit, through monthly payments, or as a lump sum. Reverse mortgages do not need to be repaid until you move out of the home or die.

Types of Reverse Mortgages

The most common type of reverse mortgage is the home equity conversion mortgage (HECM), but other types of reverse mortgages include proprietary reverse mortgages and single-purpose reverse mortgages.

Home Equity Conversion Mortgages (HECMs)

HECMs are federally insured and backed by the U.S. Department of Housing and Urban Development (HUD), and you can use the money for any purpose. However, to qualify, you must meet specific criteria:

• You must be at least age 62.
• The home must be your primary residence.
• You must either own your home or have a low mortgage balance.
• You cannot be delinquent on any federal debt such as federal taxes or federal student loans.
• The home must meet required property standards.
• You’ll have to go through counseling from a HUD-approved reverse mortgage counseling agency.

Proprietary Reverse Mortgages

Proprietary reverse mortgages are private loan options. Rather than being federally backed, they’re backed by the companies that offer them.

If you own a more expensive home, you may receive more money from these types of reverse mortgages because they are not bound by the Federal Housing Authority (FHA) lending limits. Like HECMs, proprietary reverse mortgages generally have no restrictions on how you can use the funds.

Single-Purpose Reverse Mortgages

The least expensive of reverse mortgage types, single-purpose reverse mortgages are offered by organizations such as nonprofits, state agencies, and local governments. They are not federally insured. Most low- to moderate-income homeowners can qualify.

Unlike proprietary reverse mortgages or HECMs, you can only use the money for a specific purpose that is approved by the lender. Some examples of ways you can use the funds include for:

• Home repairs
• Home improvements
• Property taxes

Who Qualifies for a Reverse Mortgage?

To get a reverse mortgage, you must meet specific requirements. Once you’ve acquired the mortgage, there are also criteria you’ll need to meet, as you would with a standard mortgage.

Qualifying for a Reverse Mortgage

Along with those criteria, the amount of money you’ll be able to borrow will depend on a number of factors, including:

• Your age (you must be over 62)
• The type of reverse mortgage
• Current interest rate
• Your financial situation, including your credit history (lenders assess your ability and willingness to maintain payments of property taxes and homeowners insurance)
• How much money, if any, you owe on the home

These variables apply to all types of reverse mortgages.

Ongoing Requirements for a Reverse Mortgage

Once you’ve qualified for a reverse mortgage and have received your money, you’ll need to meet ongoing requirements. First, because you’re using your home to secure the loan, the lender will require you maintain it properly so the property doesn’t lose value.

This may mean keeping up with regular maintenance such as maintaining the lawn and addressing any needed repairs. You’ll also need to keep up with ongoing payments such as property taxes and homeowners insurance.

Reverse Mortgage Payments and Costs

You can receive the funds from a reverse mortgage in several ways, each with varying costs to consider.

Reverse Mortgage Payments

Once you determine how much of your equity will be paid out, you’ll have the ability to choose how you’ll get your money. With a home equity conversion mortgage, you can choose from several options:

• Tenure option: This option gives you a fixed monthly cash advance for as long as you live in the home.
• Lump-sum payment: Lump-sum payments are only available with fixed-rate loans and may offer less money than other options.
• Term option: This provides you with a fixed disbursement each month for a specified period of time.
• Line of credit: You can choose how and when to withdraw the funds.
• Combination: You can combine the line of credit and monthly payment options.

Reverse Mortgage Costs

The costs associated with a reverse mortgage include upfront costs and ongoing costs. Upfront costs include:

• Origination fees: Capped at $6,000.
• Mortgage insurance payment: You’ll need to make your first mortgage insurance premium payment.
• Closing costs: Closing costs can include appraisal fees, credit checks, title searches, inspections, mortgage taxes, and recording fees.

Although you’ll need to plan for these upfront payments when you originate your reverse mortgage, you’ll also face other ongoing costs that may include:

• Mortgage insurance payments: The annual cost of your mortgage insurance premium is 0.5% of your total mortgage balance for an HECM.
• Interest: Most reverse mortgages have a variable interest rate. This means that as rates fluctuate, so will the amount of interest on your loan.
• Servicing fees: These fees come from your lender and are charged to cover the cost of maintaining your loan.
• Home insurance: Homeowners insurance protects your property (and the bank’s investment) for covered events.
• Property taxes: Property taxes are an annual cost based on the value of your property.

How To Pay Back a Reverse Mortgage

Reverse mortgages generally don’t require repayment until the borrower no longer lives in the home, such as if they die or move. At that time, you have several options for repaying it.

In some cases, you may want to pay off the reverse mortgage before it becomes due. For example, you may no longer need the money, or you’d like to use other income to repay the balance. Typically, there are no prepayment penalties for repaying your loan before it comes due. It can also help you to save on interest, lowering your total loan amount overall.

When the Borrower Dies

When the borrower passes away, the loan will also become due. Depending on what the owner’s will dictates, those who inherit the property then repay the loan. Most heirs do so by selling the home. If they would like to keep the property, they can pay off the loan in other ways, such as with their own money.

If a spouse passes away, the remaining spouse may be able to stay in the home. This will depend on factors such as the type of reverse mortgage, when they were married, whether they’ve always lived in the home, and whether the remaining spouse is a borrower on the loan.

Frequently Asked Questions (FAQs)

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