Overview
Older homeowners who need cash for living expenses or retirement can get it through a reverse mortgage. This type of loan may help seniors with little savings or few other sources of income. Still, it’s important to carefully consider this option, as it can be complicated and may affect your long-term finances.
What Is a Reverse Mortgage?
Reverse mortgages are loans designed for homeowners, usually aged 62 or older, that let them tap into their home’s equity without needing to sell the property. The money received from a reverse mortgage is tax-free and can be spent on home improvements, medical expenses, or as extra income during retirement.
The most common type is the Home Equity Conversion Mortgage (HECM), offered through government-backed programs with strict rules and standards. Private lenders also provide reverse mortgages, but their requirements may differ and are often less regulated.
What Is the Process of a Reverse Mortgage?
A reverse mortgage allows homeowners to borrow against their home’s value without making monthly payments; the loan is repaid when the borrower dies, moves out, or sells the house. The owner retains the title, and any remaining sale proceeds go to them or their estate. Both individuals and cohabiting couples, married or not, can take out a reverse mortgage.
How To Get a Reverse Mortgage
If you're an older homeowner with home equity, a reverse mortgage may be an option. To qualify for a government-backed reverse mortgage, you must:
- Be 62 or older
- Live in the home as your main residence
- Have substantial equity or own it outright
- Owe nothing to the federal government
If you have a mortgage, you must pay it off at closing using your funds or proceeds from the reverse mortgage.
Reverse Mortgage Borrowing Limits
Proprietary reverse mortgages have lender-set borrowing limits, while government-backed programs cap loans at a portion of your home’s value, accounting for collateral and market risks. Limits also vary based on age, credit, and interest rates.
Types of Reverse Mortgages
Reverse mortgages come in three forms. Most are backed by the Federal Housing Administration (FHA), though private options exist with fewer requirements but higher risk.
HECMs
Home conversion equity mortgages are FHA-backed, issued by approved lenders. Applicants must complete HUD counseling to understand the loan terms and costs.
Proprietary Reverse Mortgage
These private loans aren’t government-backed; lenders set all terms. They may be accessible, but they pose risks, including potential fraud targeting seniors.
Single-purpose Reverse Mortgage
Offered by certain government agencies or nonprofits, this is usually the cheapest option, but it is restricted to specific uses, such as home repairs or property taxes.
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