Reverse Mortgages: A Guide to Getting Started

Getting started with a reverse mortgage can seem daunting, but it's a great option for many homeowners. Reverse mortgages allow homeowners 62 and older to borrow money using the equity in their home.

To qualify, you'll need to own your home outright or have a low balance on your mortgage. The property must also be your primary residence.

The amount you can borrow varies, but it's typically based on the value of your home, your age, and current interest rates. For example, a $200,000 home with a 62-year-old homeowner could result in a loan of up to $120,000.

A reverse mortgage is a type of loan that pays off the current mortgage of homeowners ages 55 and older.

It allows homeowners to receive tax-free payments from their reverse mortgage lender by borrowing against their home's equity.

Homeowners typically use reverse mortgages to supplement their retirement income.

They can also use them to pay off higher-interest debt, pay for home repairs or improvements, and cover medical expenses.

In each situation where regular income or available savings are insufficient to cover expenses, a reverse mortgage can keep seniors from turning to high-interest lines of credit or other more costly loans.

Some reverse mortgage options even allow the borrower to buy a new primary residence, giving you the option to downsize or relocate from your current home.

Here are some common reasons homeowners use reverse mortgages:

To qualify for a reverse mortgage, you'll need to meet certain requirements. These vary by lender, but generally, you must be over a certain age, usually 60 or 65.

In Australia, for example, the borrower must be over 60 or 65, and if there's more than one borrower, the youngest must meet the age requirement. The borrower must also own the property or have a low enough mortgage balance that it will be extinguished by the reverse mortgage proceeds.

You'll also need to be responsible for maintaining the property, including physical repairs. Some programs require periodic reassessments of the property's value.

In the US, the primary borrower must be at least 62 years old to be eligible for a HECM reverse mortgage. You must also live in your home as your primary residence and participate in an information session with a HUD-approved reverse mortgage counselor.

You can't be delinquent on any federal debt and must continue to pay homeowners insurance, property taxes, and any homeowners association dues.

A reverse mortgage requires a considerable amount of equity in your home, but you won't be able to borrow the entire value of your home, even if you've paid off your primary mortgage.

You'll need to consider the age of the youngest borrower or eligible non-borrowing spouse, as well as the home's value and current interest rates, to determine how much you can borrow. The amount you can borrow is known as the principal limit, and it varies based on these factors.

The principal limit for a HECM is determined by the age of the youngest borrower, the home's value, and the current interest rates. You're more likely to be eligible for a higher principal limit the older you are, the more the property is worth, and the lower the interest rate.

Here are some ways you can receive the money from a reverse mortgage:

Keep in mind that the line of credit option accrues growth, meaning that whatever is available and unused on the line of credit will automatically grow larger at a compounding rate.

To understand how reverse mortgages work, it's essential to know that you'll need a considerable amount of equity in your home to be eligible. You won't be able to borrow the entire value of your home, even if you've paid off your primary mortgage.

The amount you can borrow, known as the principal limit, varies based on your age, the home's value, and current interest rates. The HECM mortgage limit is $1,149,825 in 2024 and $1,209,750 in 2025.

You're more likely to be eligible for a higher principal limit the older you are, the more the property is worth, and the lower the interest rate. With a variable interest rate, you have more payment options, including equal monthly payments, a line of credit, or a combination of both.

The interest on the reverse mortgage accrues every month, but you can roll these charges into the loan balance. Note that the interest rates on reverse mortgages tend to be higher compared to regular mortgages.

As a homeowner, you'll still need to pay for homeowners insurance, property taxes, any homeowners association dues, and the home's upkeep while living in the home. Once you move out, you're required to repay the loan balance.

If you pass away, your heirs can sell the house to cover the loan or turn the house over to the lender to satisfy the loan. If they want to keep the house, they can settle up with the lender by paying either the full loan balance or 95 percent of the appraised value of the house, whichever is less.

Here are your payment options with a variable-rate HECM:

Available proceeds from a reverse mortgage can be distributed in various ways, including a lump sum, monthly payments, a line of credit, or a combination of these. The amount you can borrow is called the principal limit, which varies based on your age, the value of your home, and current interest rates.

You're more likely to be eligible for a higher principal limit the older you are and the more your property is worth. For example, if you're 75 years old and have a $250,000 property, you might be eligible for a principal limit of $125,000 to $150,000.

The principal limit is calculated based on the maximum claim amount, your age, the expected interest rate, and a table to PL factors published by HUD. This means that your age is a significant factor in determining how much you can borrow.

Here are some examples of principal limits for various ages and expected interest rates, assuming a property value of $250,000:

The line of credit option accrues growth, meaning that whatever is available and unused on the line of credit will automatically grow larger at a compounding rate. This can potentially give you access to more cash over time than what you initially qualified for at origination.

Reverse mortgages can be a great way to supplement your income in retirement, and here's why: they provide tax-free supplemental income. This can be a huge relief for homeowners who are living on a fixed income.

One of the best things about reverse mortgages is that they allow homeowners to age in place. This means you can stay in your home and enjoy the comfort and familiarity of your surroundings, without having to worry about making monthly mortgage payments.

Here are some key benefits to consider:

However, it's also worth noting that reverse mortgages aren't without drawbacks.

Reverse mortgages can be a complex financial product, and understanding the costs and fees involved is crucial before making a decision. The cost of getting a reverse mortgage can be substantial, with application fees ranging from $0 to $950.

The interest rate on a reverse mortgage also varies, and since 2012, new loans are not allowed to have fixed rates. This means that the interest rate can change over time, affecting the amount of interest you owe on your loan.

Some reverse mortgage programs have monthly service charges that compound with the principal, which can add up quickly. However, the best products have no monthly fees. Here are some examples of the costs associated with a HECM reverse mortgage:

These costs can be rolled into the loan itself, making it essential to carefully review the terms and conditions before signing any agreements.

The cost of a reverse mortgage can be a significant factor to consider. It's essential to understand what costs are associated with these loans.

The loan size and cost are determined by several factors, including the borrower's age, current interest rates, property value, and location.

Typical costs for a reverse mortgage include an application fee, which can range from $0 to $950, and stamp duty, mortgage registration fees, and other government charges that vary with location.

The interest rate on a reverse mortgage can vary, with some programs offering fixed rate loans and others offering variable rate loans. Since 2012, new reverse mortgage loans are not allowed to have fixed rates.

A monthly service charge may be applied to the balance of the loan, which compounds with the principal. The best products have no monthly fees.

Here's a breakdown of the costs associated with a HECM reverse mortgage:

These costs can add up quickly, so it's essential to carefully review the terms and conditions of any reverse mortgage before committing to one.

Taxability of HECM proceeds is a key consideration when it comes to understanding the financial implications of a reverse mortgage. The good news is that loan advances are not considered taxable income.

Annuity advances, on the other hand, may be partially taxable. This is an important distinction to keep in mind, especially if you're considering a reverse mortgage as a way to supplement your retirement income.

Interest charged on a reverse mortgage is not deductible until it's actually paid, which typically happens at the end of the loan. This can be a significant financial burden, so it's essential to factor this into your long-term financial plan.

The mortgage insurance premium is, however, deductible on your 1040 long form. This can provide some relief on your tax bill, but it's essential to keep in mind the potential tax implications of annuity advances.

Here's a quick rundown of the taxability of HECM proceeds:

It's also worth noting that if you receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account past the end of the calendar month in which it is received. This could affect your eligibility for these programs.

Before making a decision about a reverse mortgage, consider the alternatives and their implications. If you're not sold on taking out a reverse mortgage, consider borrowing against your home's equity with a home equity loan or home equity line of credit (HELOC). These options allow you to borrow up to 85 percent of your home's value, with lower interest rates and fees compared to a reverse mortgage.

Home equity loans and HELOCs come with different repayment structures: home equity loans require monthly payments, while HELOCs allow you to make payments after the draw period ends. You can also explore refinancing your mortgage to lower your monthly payments, either by shortening the loan term or spreading out your payments over a longer period. However, refinancing may mean paying more in interest over the life of the loan.

Some other options to consider include a shared equity agreement, where you partner with a company to receive money in exchange for a percentage of your home's value. This option is similar to a reverse mortgage in that you won't make monthly payments, but the money must be repaid once the term ends. It's essential to weigh the pros and cons of each option carefully, taking into account your family's needs, your heirs' potential obligations, and your own financial situation.

If you're not sold on a reverse mortgage, there are other options to consider. Home equity loans and home equity lines of credit (HELOCs) allow you to borrow against your home's equity, up to 85 percent in most cases. These options tend to have lower interest rates and fees compared to reverse mortgages.

A home equity loan requires monthly payments, whereas a HELOC allows you to make payments after the draw period ends. If you've yet to pay off your mortgage, refinancing could help lower your monthly payments, especially if you can get a lower interest rate on top of a shorter term.

Refinancing can also involve spreading out what you currently owe over a longer term, which will mean you'll pay more total in interest. However, this can still lower your monthly payments significantly. If you need substantially more funds, a cash-out refinance might be worth considering.

A shared equity agreement is another option, where you partner with a company to get money in exchange for a percentage of your home's value, and often a piece of future appreciation as well. With this arrangement, you aren't obligated to make monthly payments, but the money must be repaid once the term ends.

Here are some key features of these alternatives:

When buying a home, you should consider how a reverse mortgage could affect your family.

Your spouse might not be able to stay in the home after you die if you take out a reverse mortgage.

It's essential to check if the reverse mortgage has a non-recourse clause to protect your heirs from owing more than the home's value.

The costs and fees for some reverse mortgages can be more expensive if you stay in the home a short time or borrow a small amount of money.

A reverse mortgage can make sense for some seniors, mainly those who need additional income to pay their bills and plan to stay in their home.

To determine if a reverse mortgage is right for you, consider your financial situation and goals. Do you need extra money to cover medical expenses or pay for in-home care?

A reverse mortgage can provide tax-free income, which can be used to supplement Social Security or make home improvements. This can be a game-changer for seniors who want to stay in their homes comfortably.

However, it's essential to be aware of the potential fees associated with reverse mortgages. Lenders market these products aggressively, and the fees can be steep.

To be cautious, ask yourself if you're okay with passing on the property to your heirs with a debt they'll need to pay off. If so, a reverse mortgage might be a viable option.

Consider all your options before taking out a reverse mortgage loan, as the amount you can borrow depends on your age, the interest rate, and the value of your home.

Reverse mortgages can be confusing, and many people obtain them without fully understanding the terms and conditions. A 2012 U.S. report suggests that some lenders have sought to take advantage of this complexity to offer contracts that disadvantage homeowners.

The interest rate on a reverse mortgage may be higher than on a conventional "forward mortgage", and interest compounds over the life of a reverse mortgage, which can quickly balloon. Here are some potential issues to be aware of:

High up-front costs can make reverse mortgages expensive, costing approximately the same as a traditional FHA mortgage in the United States, depending on the loan-to-value ratio.

The interest rate on a reverse mortgage may be higher than on a conventional "forward mortgage", making it more costly in the long run.

Interest compounds over the life of a reverse mortgage, which can quickly balloon and deplete the entire equity of the property.

Some borrowers may not fully understand the terms and conditions of their reverse mortgage, which can lead to confusion and potential financial harm.

Here are some key points to consider when evaluating a reverse mortgage:

In some cases, lenders have been accused of taking advantage of complexity to offer contracts that disadvantage homeowners.

If you're dealing with issues related to reverse mortgages, you can submit a complaint to the CFPB. They'll work to get you a response from the company.

The CFPB is a great resource for resolving disputes and getting help with your concerns. You can count on them to assist you in resolving your issue.

Scams targeting veterans are a real concern, and it's essential to be aware of the facts. The Department of Veterans Affairs (VA) does not offer any reverse mortgage loans.

Some mortgage ads falsely promise veterans special deals, implying VA approval or offering a "no-payment" reverse mortgage loan. This is a red flag, and you should be cautious of such claims.

If you're a veteran considering a reverse mortgage, be sure to do your research and verify the authenticity of any loan offers. Don't be swayed by promises that seem too good to be true.

If you're considering a reverse mortgage, it's essential to know your rights. You have the right to understand what happens to your reverse mortgage if you have to move out of your home into a healthcare institution.

This can be a complex issue, but it's crucial to act quickly if you receive a notice of default or foreclosure. Don't wait until it's too late to take action.

When you pass away, your family may be entitled to inherit your home, but this depends on the terms of your reverse mortgage. It's essential to explore your rights and understand what will happen to your home after you're gone.

Here are some key things to consider:

Scams targeting vulnerable individuals are a serious concern. The Department of Veterans Affairs does not offer any reverse mortgage loans, so be wary of ads promising special deals or implying VA approval.

Some scammers prey on older Americans desperate to stay in their homes, offering "no-payment" reverse mortgage loans. This is a common tactic to attract victims.

Be aware of the risks and know your rights. Here are some key things to keep in mind:

Don't fall for scams that promise the world. Stay informed and take control of your situation.