Learn about reverse mortgages, including what is required to apply, when the loan must be repaid, and what can trigger a foreclosure. You will also learn about potential alternatives to getting a reverse mortgage and how to avoid a reverse mortgage scam.
This article was adapted from content written by the Federal Trade Commission, Consumer Financial Protection Bureau, the Internal Revenue Service, and Earl Carl Institute for Legal and Social Justice - Opal Mitchell Lee Property Preservation Project. Revised on October 24, 2022.
What is a reverse mortgage?
A reverse mortgage is a loan that allows homeowners aged 62 and over to borrow against the equity in their homes.
In a reverse mortgage, you give up equity in your home in exchange for receiving regular payments, usually used to supplement retirement income.
What is home equity?
Home equity is the value of your interest in your home as a homeowner. Home equity is determined by the current market value after any liens on the property are subtracted.
How is a reverse mortgage different from a regular mortgage?
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you.
Reverse mortgages take part of the equity in your home and convert it into payments to you. You receive the payments in a lump sum, a monthly advance, a line of credit, or a combination of all three.
Unlike a regular mortgage, when you have a reverse mortgage the amount you owe rises over time. This is because interest and fees are added to your loan balance each month.
What are the different types of reverse mortgages?
There are three kinds of reverse mortgages:
Single-purpose reverse mortgages are the least expensive option. They’re offered by state and local government agencies, as well as non-profit organizations. These loans can be used for only one purpose, which the lender specifies. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.
Proprietary reverse mortgages are private loans that are backed by the companies that develop them. If you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. If your home has a higher appraised value and you have a small mortgage, you might qualify for more funds.
Home Equity Conversion Mortgages (HECMs) are federally-insured reverse mortgages and are backed by the U. S. Department of Housing and Urban Development (HUD). HECM loans can be used for any purpose.
HECMs and proprietary reverse mortgages may be more expensive than traditional home loans, and the upfront costs can be high. That’s important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount.
What are the requirements to take out a Home Equity Conversion Mortgage (HECM)?
Home Equity Conversion Mortgages (HECMs) are available to homeowners who are 62 and older.
Additional requirements include:
Your home must be your principal residence, meaning you live there the majority of the year.
You must either own your home outright or have a low mortgage balance. Owning your home outright means you do not have a mortgage on it anymore. If you have a mortgage balance, you must be able to pay it off when you close on the reverse mortgage. You can use your own funds or money from the reverse mortgage to pay off your existing mortgage balance.
You cannot owe any federal debt, such as federal income taxes or federal student loans. You may, however, use money from the reverse mortgage loan to pay off this debt.
You must have enough of your own money or agree to set aside part of the reverse mortgage funds at your loan closing to pay ongoing property charges, including taxes and insurance, as well as maintenance and repair costs.
Your home must be in good shape. If your house does not meet the required property standards, the lender will tell you what repairs need to be made before you can get a reverse mortgage loan.
You must receive counseling from a HUD-approved reverse mortgage counseling agency to discuss your eligibility, the financial implications of the loan, and other alternatives.
How much can I borrow with a Home Equity Conversion Mortgage (HECM) or proprietary reverse mortgage?
How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors:
The type of reverse mortgage you select
The appraised value of your home
Current interest rates, and
A financial assessment of your willingness and ability to pay property taxes and homeowner’s insurance
In general, the more equity you have in your home, and the less you owe on it, the more money you can get.
How much does reverse mortgage counseling cost?
You must receive counseling from a HUD-approved reverse mortgage counselor before taking out a HECM reverse mortgage loan.
Counseling costs will vary depending on the agency and your individual situation. The housing counseling agency must make a determination about your ability to pay, taking into account factors such as income and debts. HUD approved counseling agencies may charge you a reasonable fee, but they must explain all charges prior to counseling. They cannot charge you a fee if you can’t afford it.
What should I ask a reverse mortgage counselor?
If you’re considering a reverse mortgage, here are some sample questions to discuss with a housing counselor:
How does a reverse mortgage loan work?
How is a reverse mortgage loan different from a traditional mortgage?
What are the upfront costs and fees in taking out a reverse mortgage loan?
What will be the ongoing costs and fees if I have a reverse mortgage loan?
How will a reverse mortgage loan affect my spouse, or other people living with me?
What happens if I want to sell my home once I have a reverse mortgage loan?
What happens to my home when I pass away?
What happens if I have to move to a nursing home?
How do I receive the money from my loan proceeds? Would it be better to take out the money as a line of credit, in monthly installments, or in a lump sum?
If I already have a mortgage on my house, how is that affected by a reverse mortgage?
What are my ongoing responsibilities once I have a reverse mortgage loan?
What other options should I consider other than a reverse mortgage loan?
If you discussed reverse mortgages with a lender before speaking with a counselor, tell your counselor about that discussion. Did the lender recommend a particular loan type? Did the lender try to sell you anything in addition to the reverse mortgage, or describe any conditions? Your counselor can give you unbiased information about the characteristics of the loan you may be considering.
What are the other upfront costs of reverse mortgages?
Like with a traditional mortgage, borrowers will typically have to pay one-time upfront costs at the beginning of the reverse mortgage loan. These costs include:
Origination fees (which cannot exceed $6,000 and are paid to the lender).
Real estate closing costs (paid to third-parties) that can include an appraisal, title search, surveys, inspections, recording fees, mortgage taxes, credit checks, and other fees.
An initial mortgage insurance premium: There is an initial and annual mortgage insurance premium charged by your lender and paid to the Federal Housing Administration. Mortgage insurance guarantees that you will receive your expected loan advances. This insurance is different and in addition to what you have to pay for homeowners insurance.
You can pay these costs in cash or by using the money from your loan. Using your loan proceeds to pay for upfront costs means you won’t have to bring any money to the closing, but the total amount of money you’ll have available from the reverse mortgage loan will be less.
What are the ongoing costs for reverse mortgages?
Ongoing costs are added to your loan balance each month. This means that each month you are charged interest and fees on top of the interest and fees that were added to your previous month’s loan balance. Ongoing costs may include:
Servicing fees paid to your lender to cover such costs as:
- sending you account statements
distributing your loan proceeds, and
- making certain that you keep up with the loan requirements
Annual mortgage insurance premium, which is 0.5% of the outstanding mortgage balance
Property charges such as homeowners insurance and property taxes (and flood insurance, if applicable)
The larger your loan balance and the longer you keep your loan, the more you will be charged in ongoing costs. The best way to keep your ongoing costs low is to borrow only as much as you need.
Note: This information only applies to Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage loan.
Is a reverse mortgage taxable?
Reverse mortgage payments aren't taxable. Reverse mortgage payments are loan proceeds, not income. The lender pays you, the borrower, loan proceeds while you continue to live in your home.
Do I keep the title to my home if I have a reverse mortgage?
Yes, you keep the title to your home.
Will a reverse mortgage affect my Social Security or Medicare benefits?
No, reverse mortgages do not affect Social Security or Medicare eligibility. A reverse mortgage could impact needs-based programs like Medicaid or SSI, however.
What is a "non-borrower" and a "co-borrower?"
A "non-borrower" is a person who lives in the home but whose name is not on the loan documents. Typically, the non-borrower must move when the borrower passes away unless HUD guidelines qualify them to stay.
A "co-borrower" is a person whose name is on the loan documents along with the homeowner (applicant). The co-borrower is equally responsible to repay the loan. If the homeowner passes away, the co-borrower along children, other relatives, or others can stay in the home.
When does a reverse mortgage loan have to be repaid?
Generally, you don’t have to pay back the money for as long as you live in your home.
Depending on the plan, your reverse mortgage becomes due with interest when the last surviving borrower:
Sells the home
Reaches the end of a pre-selected loan period
Fails to pay taxes
Fails to maintain insurance
Fails to make needed repairs, or
You, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan. In certain situations, a non-borrowing spouse may be able to remain in the home.
What can trigger foreclosure?
A foreclosure can be triggered if you do not comply with the terms of the reverse mortgage.
Foreclosures can occur when you, the homeowner:
Fail to pay property taxes
Fail to maintain insurance
Fail to make needed repairs
Do not live in the home the required amount of time
What if I cannot pay my property charges, such as taxes and insurance?
If you cannot pay your property charges, such as taxes and insurance, seek help from the Texas Homeowners Assistance program.
If you do not pay your property charges, the lender will pay. You will owe the lender for the charges and you will risk foreclosure. You can ask your servicer for a payment plan to pay back the charges. Be sure to tell your lender if you are behind on payments due to hardship from COVID-19, as that may give you additional repayment options.
HUD says that if you are already in a repayment plan for an HECM reverse mortgage, but cannot meet the payments due to COVID-19, you may ask for an additional payment plan. These additional payment plans are only available to those who take part in the Texas Homeowners Assistance program.
While lenders may give you a repayment plan, they do not have to do so.
What are some alternatives to a reverse mortgage?
Before taking out a reverse mortgage, make sure you understand this type of loan. You may want to look at other borrowing and housing options such as:
If you take out a reverse mortgage loan when you are too young, you may run out of money when you’re older.
Other home equity options
A home equity loan or a home equity line of credit might be a cheaper way to borrow cash against your equity. However, these loans carry their own risks and usually have monthly payments. Qualifying for these loans also depends on your income and credit.
Depending on interest rates, refinancing your current mortgage with a new traditional mortgage could lower your monthly mortgage payments. Pay attention to the length of time you’ll have to repay your new mortgage as it can affect your retirement plan. For example, taking on a new 30-year mortgage when you are nearing retirement can become a hardship later. Consider choosing a shorter-term mortgage, such as a 10- or 15-year loan.
Consider selling your home. Moving to a more affordable home may be your best option to reduce your overall expenses.
Lowering your expenses
How do I avoid a reverse mortgage scam?
Take care in the following situations:
Be wary of sales pitches for a reverse mortgage, especially if a salesperson implies a reverse mortgage is a solution for all your problems, pushes you to take out a loan, or has ideas on how you should spend the money from a reverse mortgage.
If you decide to get a reverse mortgage, shop around before deciding on a particular seller.
Resist any pressure from reverse mortgage salespeople to buy other financial products, like an annuity or long-term care insurance. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage. You don’t have to buy any financial products or services to get a reverse mortgage.
Some salespeople try to rush you through the process. Stop and check with a housing counselor or someone you trust before you sign anything. A reverse mortgage can be complicated, and isn’t something to rush into.
The bottom line: If you don’t understand the cost or features of a reverse mortgage, walk away. If you feel pressure or urgency to complete the deal – walk away. Do some research and find a counselor or company you feel comfortable with.
What if I suspect a scam?
Do I have a right to cancel my reverse mortgage?
With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.”
To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid for the financing.
Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less expensive alternatives. You can learn more from the following organizations:
U. S. Department of Housing and Urban Development (HUD)
Consumer Financial Protection Bureau
1-855- 411-CFPB (1-855-411-2372)
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