Reverse mortgages can provide homeowners 62 and older a great way to draw on home equity without having to take out a home equity loan or line of credit. While no monthly mortgage payments are required, there are a few things to consider when deciding if a reverse mortgage loan is appropriate for you and your family.
- Borrower occupancy. Reverse mortgage rules require at least one borrower to occupy the mortgaged home as their primary residence.
- Borrower education. HUD-insured reverse mortgages, which HUD calls home equity conversion mortgages (HECM), require borrowers to complete an educational session on reverse mortgage loans. The session is available through HUD-approved housing counseling agencies and online.
- Costs. Closing costs and mortgage insurance premiums (MIP) can be paid at closing or added to the amount of your reverse mortgage. Adding closing costs and MIP to your loan amount reduces your initial cash outlay, but it also lowers the amount available for withdrawal from your loan proceeds. Reverse mortgage lenders typically charge a loan origination fee based on the amount you borrow and may also charge a monthly servicing fee.
HUD-insured reverse mortgages require borrowers to pay a mortgage insurance premium (MIP), which are paid in two segments. There is an initial MIP due at closing. For reverse mortgages insured by HUD's HECM program, this amount ranges from 0.50 to 2.50 percent of the reverse mortgage loan amount. It varies according to how you choose to withdraw funds from your reverse mortgage. The second MIP payment is an annual premium calculated at 1.25 percent of the loan amount over the life of the reverse mortgage.
Review and compare estimated lender fees and charges included in mortgage quotes to help with finding your best deal.
- Reverse mortgage proceeds are first used to pay off any existing mortgage loan. This reduces the amount available for withdrawal. Advise mortgage lender representatives of the balance owed on any existing mortgage loan to help with estimating your payout options on a reverse mortgage.
- You are responsible for paying property-related expenses. These include property taxes, hazard insurance and, if applicable, HOA dues and flood insurance premiums. Failure to pay these expenses jeopardizes your reverse mortgage lender's collateral interest in your home and could lead to foreclosure.
- Choose how to receive cash distributions. You may be able to withdraw funds in a lump sum at closing or schedule periodic withdrawals. Another option allows partial withdrawal of the mortgage proceeds as a lump sum and receiving the balance of available funds as periodic payments.
- Reverse mortgages become due and payable after the last borrower leaves the home. This usually means that the mortgaged home must be sold or refinanced to pay off the reverse mortgage balance.
- Realize there is an impact on estate and inheritance. A reverse mortgage, like any mortgage secured by the property, reduces the value of your estate and your heirs' inheritance. Consult an estate planner or an attorney specializing in estate law to learn more.
We recommend requesting multiple reverse mortgage quotes from our network of mortgage lenders, who can provide guidance based on individual circumstances.