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If you have a lot of home equity but not enough income for retirement, a reverse mortgage could help. With a reverse mortgage, homeowners 62 years or older can borrow against the equity in their home and receive funds from a lender. This money can be used to cover living expenses and home improvements without you having to move or make monthly loan payments.
When you get a reverse mortgage, you remain the owner of your home, and you use the proceeds to pay off whatever is left of your existing mortgage.
Here’s what you’ll find in this reverse mortgage guide:
- What is a reverse mortgage?
- How to qualify for a reverse mortgage
- Types of reverse mortgages
- How reverse mortgages work
- When a reverse mortgage might be for you
- When a reverse mortgage might not be for you
- How to get a reverse mortgage
- Alternatives to a reverse mortgage
What is a reverse mortgage?
A reverse mortgage is a loan that unlocks the home equity you’ve accumulated so you can access it as a lump sum, a line of credit, or a stream of monthly payments.
Unlike a regular mortgage (also called a forward mortgage) or a second mortgage, you don’t have to make any payments on a reverse mortgage as long as you live in the home as your main residence. However, you will have to pay off your existing mortgage at or before closing on your reverse mortgage.
If you die or permanently move out, the loan must be repaid. This is typically done by selling the home. Alternatively, you or your heirs can repay the loan or pay the lender 95% of the home’s appraised value and keep the home.
- If your home increases in value while you have a reverse mortgage: Any excess value will go to you or your estate. This also happens if you die, sell, or move before accessing all the equity available through your loan.
- If your home decreases in value while you have a reverse mortgage: Neither you nor your estate will have to make up the difference. The reverse mortgage insurance premiums you will pay make this benefit possible.
How to qualify for a reverse mortgage
You must meet these qualifications to be eligible for a reverse mortgage:
- Be at least 62 years old
- Own one of these eligible property types: single-family home, two- to four-unit home (as long as you live in one unit), condo approved by HUD or the FHA, manufactured home approved by the FHA
- Live in the property as your main home
- Be able to afford ongoing homeowners insurance, property taxes, maintenance, and, if applicable, flood insurance and homeowners association fees
- Own your home outright, or have at least 50% equity in your home
- Complete a HUD-approved reverse mortgage counseling session
- Not be delinquent on any federal debt (such as taxes or student loans)
Learn More: Should You Pay Off Your Mortgage Before You Retire?
Types of reverse mortgages
There are three types of reverse mortgages you can consider for your situation.
- Home Equity Conversion Mortgage (HECM): The most common type of reverse mortgage, the HECM is insured by the Federal Housing Administration and available only through FHA-approved reverse mortgage lenders. You can use these loans for any purpose.
- Proprietary reverse mortgage: A less-common type of reverse mortgage for owners of homes valued above the FHA’s limit, which is $765,600 in 2020. Sometimes called a jumbo reverse mortgage.
- Single-purpose reverse mortgage: A less-common type of reverse mortgage for low- to moderate-income seniors who need funds for home repairs, home improvements, or property taxes. Unlike HECMs, these loans can only be used for one purpose specified by the lender.
- One-time, lump-sum payment: This is only available for fixed-rate loans.
- Line of credit: Unscheduled payments in the amount of your choosing.
- Tenure: Fixed monthly payments for as long as you live in your home.
- Term: Fixed monthly payments for a certain number of years.
- Modified Tenure: Smaller line of credit with smaller fixed monthly payments for as long as you live in your home.
- Modified Term: Smaller line of credit with smaller fixed monthly payments for a certain number of years.
If you choose a proprietary reverse mortgage, your options for receiving the funds will depend on the lender. Similarly, the nonprofit or government agency that issues a single-purpose reverse mortgage will determine the disbursement schedule.
How reverse mortgages work
A reverse mortgage gives you access to a portion of your home equity, called the initial principal limit. This limit depends on four factors:
- Your age: Lenders factor in the age of the youngest borrower or eligible non-borrowing spouse. Younger borrowers receive less money due to their life expectancy being longer.
- Current interest rates: Higher interest rates reduce borrowing power.
- The value of your home: The amount you can borrow is partially based on the lesser of your home’s appraised value, the FHA limit, or the sales price. In 2020, the FHA limit is $765,600, and the sales price is only factored in if you’re using a HECM for purchase.
- How much you owe on your current mortgage (if applicable): If you don’t own your home outright or have at least 50% equity in your home, you won’t be able to receive a reverse mortgage.
Your loan balance will grow over time as you receive payments. Interest accrues on the payments you receive, and interest accrues on that interest, too.
- Initial mortgage insurance premium of 2% of the original amount borrowed ($2,000 per $100,000)
- Annual mortgage insurance premiums of 0.5% of the remaining loan balance ($500 per $100,000)
- Third-party fees, such as a home appraisal, title search and insurance, surveys, inspections, and other fees
- Origination fee of $2,500 to $6,000, based on your home’s value
- Monthly servicing fee of $30 or $35
The lender will subtract these fees from the amount you’re eligible to borrow. You can also pay these fees in cash up-front.
When a reverse mortgage might be for you
- You want to age in place and your home can accommodate it.
- Your home needs accessibility improvements for aging in place.
- You don’t care about leaving your home to your heirs.
- You want or need cash, and you can’t qualify for a mortgage refinance, home equity loan, or home equity line of credit, perhaps because you have bad credit.
- You can afford to keep up indefinitely with homeowners insurance, taxes, and maintenance.
When a reverse mortgage might not be for you
- You rely on certain government need-based benefits, such as Medicaid or Supplemental Security Income (SSI), which may be disrupted if you take out a reverse mortgage.
- You want someone to inherit your home free and clear of any debt when you die.
- You think you may want to move. (A HECM for Purchase may be an option if you want to move and still be a homeowner.)
- Your health might require you to move into an assisted living or nursing facility for more than 12 months.
- Your spouse will not be a co-borrower. A non-borrowing spouse will not receive any further reverse mortgage proceeds after a borrowing spouse dies, and in some circumstances, they may not be able to keep living in the home. (Eligibility is determined when you apply.)
Learn More: Cash-Out Refinancing vs. Home Equity Loan: How to Choose
How to get a reverse mortgage
Here are the steps you’ll need to follow to get a reverse mortgage:
- Gather your financial information.
- Apply for the same type of reverse mortgage with at least three lenders.
- Compare offers. The lower the interest rate and fees, the more money you’ll get.
- Decide which lender to work with and which type of loan you want.
- Attend an approved reverse mortgage counseling session.
- Complete a reverse mortgage financial assessment.
- Close your loan.
Find Out: How to Refinance Your Mortgage in 6 Easy Steps
Alternatives to a reverse mortgage
If you need cash during retirement and want to access the value of your home without moving, a reverse mortgage isn’t your only option, and some alternatives might be cheaper. Here are a few options:
- Home equity loan: Borrow a lump sum at a fixed interest rate and repay the loan in fixed monthly payments over as many as 30 years. Home equity loans offer stability and predictability when you know how much you need to borrow and you want to keep your existing mortgage.
- Home equity line of credit (HELOC): Borrow smaller sums against the value of your home as you need them during an initial draw period of several years. During the draw period of a home equity line of credit, you may be able to make small, interest-only payments. During the repayment period, you’ll repay the principal you borrowed, with interest. The interest rate on a HELOC is variable.
- Cash-out refinance: Refinance your existing mortgage and then some. A cash-out refinance can be a good option if mortgage refinance rates are lower than the interest rate you currently pay.
The potential drawbacks of these three alternatives are that none will be available if your home is worth less than you owe. To qualify for a regular cash-out refinance on a single-unit primary residence, you’ll need to have 20% equity remaining in your home after getting the new loan.
If you considered each option and have decided to go with a cash-out refinance, be sure to shop around and compare rates with multiple lenders. You can do this easily with Credible — and you’ll be able to see your pre-qualified rates in only three minutes.
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Keep reading: Home Equity Loan or HELOC vs. Reverse Mortgage: How to Choose
