Reverse mortgages get their funny name because they run in reverse. Ordinary “forward” mortgages begin with a large balance, and as the borrower makes payments to the lender, the balance shrinks until the loan is retired. Reverse mortgages, however, start with zero balances, which increase as the lender pays the borrower.
Reverse mortgages are specialized products created to meet the needs of “house poor” seniors – folks who have plenty of home equity, but not enough cash. Here are the main facts about reverse mortgages:
There are four types of reverse mortgages.
- Home Equity Conversion Mortgages (HECMs, pronounced “heck’ums”) are insured by FHA and their fees are regulated by HUD. About 90 percent of all reverse mortgages are HECMs.
- HECM Saver (also called HECM Lite) is a smaller, less expensive version of the HECM. Costs and loan amounts are much lower for this program.
- Special purpose or single purpose reverse mortgages are for seniors with very low incomes, and are subsidized by community organizations or local governments. Their purpose is usually to help pay property taxes and take care of home repairs.
- Proprietary, private or jumbo reverse mortgages are more expensive, but they can be useful – for example, they might be offered to younger borrowers, or come with higher loan amounts.
There are five ways of taking reverse mortgage proceeds.
- Receive monthly payments for a specific term like five or ten years. Some seniors do this to delay receiving Social Security benefits and increase their monthly payments.
- Receive monthly payments for life. No matter how long you live, even if your loan balance outstrips the value of your home, your payments are protected.
- Take the entire loan balance as a lump sum. This option is the only one that allows you to choose a fixed interest rate instead of an adjustable one.
- Set up a line of credit. This is the lowest-cost option and appropriate for people who want access money in the future or for emergencies. Lines of credit can even be increased as your home’s value rises.
- Select a combination of these options – for example, choose monthly payments plus a line of credit.
Most reverse mortgage require borrowers to attend counseling sessions before borrowing.
HECMs are complicated products, and HUD wants homeowners to understand what they are committing to before taking out these loans. That’s why reverse mortgage counseling is required. For private or jumbo reverse mortgages, counseling isn’t required. However, HUD does not oversee these products, and borrowers have fewer protections. For that reason, reverse mortgage counseling is probably even more appropriate for homeowners who take out private reverse mortgages.
Maximum loan amounts vary.
The amount you can borrow is determined by the interest rate, your home's value, the amount of liens against it and your age. In addition, HECM loans are bound by FHA’s maximum loan limits. Reverse mortgages differ from forward mortgages in that the final balance is unknown when you take out the loan. You might borrow $100,000 and pay it off in 5 years when you sell your home, or you might keep the house (and the mortgage) for 20 more years. Because the interest accrues as long as you have the loan, the final mortgage balance in unknown.
Qualifying for reverse mortgages is easy.
Take everything you know about qualifying for an ordinary mortgage and toss it out of your favorite window. Because you aren’t required to make monthly payments, no one cares if your income is sufficient or if your credit is pristine. You simply need to be in the “mature” age bracket – 62 or over, and you should own your home free and clear or have only a small mortgage – one that could be paid off with a reverse home loan.
There you have it – the crash course for reverse mortgages. If you like what you’ve read so far, check out the other informative articles in this section. You can learn about reverse mortgages and how they affect estate planning, eligibility for government assistance, and your investments. You’ll find reverse mortgage FAQs and find out how to shop for the best reverse mortgages.
Finally, you’ll learn who should – and who should not – consider reverse mortgages. They are powerful financial tools, and should be used with care and expert guidance.