A reverse mortgage is a loan designed to help older homeowners access home equity while using their house as collateral. This can provide financial flexibility and security in retirement, but it’s important to understand the terms.
Who Is Eligible for a Reverse Mortgage?
Reverse mortgages are intended for people who own a house outright or who have a large amount of equity. A Home Equity Conversion Mortgage (HECM) is the most popular type of reverse mortgage. It’s insured by the federal government and widely available through Federal Housing Administration (FHA)-approved lenders.
The youngest borrower for a reverse mortgage must be at least 62 years old. The U.S. Department of Housing and Urban Development sets financial eligibility criteria. The borrower must use the house as a primary residence, pay required property taxes and homeowners insurance premiums, and maintain the house according to FHA requirements.
How Much Money Can You Get and How Can It Be Used?
You might not be able to borrow an amount equal to your home’s full value, even if it’s paid off. The amount of the loan depends on the age of the youngest borrower, the current interest rate, the house’s appraised value and lending limits set by the government. You may receive money in a lump sum, equal monthly payments for a fixed time period, equal monthly payments as long as you live in the house, a line of credit, or a combination. Reverse mortgages have several fees that can make them expensive.
Seniors use funds from a reverse mortgage for a variety of purposes, including medical bills, home repairs and emergencies. If you have an outstanding mortgage balance, proceeds from the reverse mortgage must be used at closing to pay off the existing mortgage first.
Will You Have to Make Payments?
You’ll never owe more than the house is worth, no matter what happens to property values, and you won’t have to make monthly payments. A reverse mortgage generally doesn’t have to be repaid until the last borrower dies or moves out, but the loan may come due if the borrower no longer uses the house as a primary residence, falls behind on property taxes or homeowners insurance, or doesn’t properly maintain it.
If you die, your spouse may be able to continue living in the house, even if he or she wasn’t a co-borrower, or the estate may repay the reverse mortgage or sell the house. Any home equity in excess of the loan balance will become the property of the estate. If the sale price isn’t enough to pay off the reverse mortgage, the lender will take a loss.
Is a Reverse Mortgage Right for You?
A reverse mortgage can let you tap into your home equity and live comfortably in retirement, but it can be a risky financial move. Make sure that you understand the rules and fees and that you can afford to pay for property taxes, homeowners insurance and maintenance. Discuss the pros and cons of a reverse mortgage with a financial planner.
This article is intended for informational purposes only and should not be construed as professional advice.
