Understanding a Reverse Mortgage

A reverse mortgage is a type of loan that allows homeowners ages 62 and older, typically who’ve paid off their mortgage, to borrow part of their home’s equity as tax-free income. Unlike a regular mortgage in which the homeowner makes payments to the lender, with a reverse mortgage, the lender pays the homeowner.

Homeowners with this kind of mortgage don’t have a monthly payment and don’t have to sell their home, but the loan must be repaid when the borrower dies, permanently moves out or sells the home.

The amount a homeowner can borrow is called the principal limit. The more the property is worth, the lower the interest rate.

What can a reverse mortgage be used for?

Supplementing retirement income, covering the cost of needed home repairs or paying out-of-pocked medical expenses are common acceptable uses of reverse mortgage proceeds.

Eligibility Requirements:

You must own the property or have at least paid a substantial amount of your mortgage.
The property must be occupied as your primary residence.
You cannot be delinquent on any federal debt.
You must have the financial capacity to continue to make payments on property taxes, homeowner’s insurance, and homeowners association dues.
You must participate in an information session provided by a US Department of Housing and Urban Development (HUD) approved reverse mortgage counselor.

How much does a Reverse Mortgage Cost?

There will still be closing cost associated with a reverse mortgage, but the costs can be rolled into the loan.

Mortgage Insurance Premium (MIP) – There is a 2% initial MIP at closing, as well as an annual MIP equal to 0.5% of the outstanding balance. The MIP can be financed into the loan.
Origination Fee.
Servicing Fees.
Third-Party Fees such as appraisal, home inspection, credit check, title search, title insurance, or a recording fee.

Pros & Cons

Pros

Borrower doesn’t need to make monthly payment toward their loan balance

Proceeds can be used for living and healthcare expenses, debt repayment and other bills

Funds can help borrowers enjoy their retirement

Non-borrowing spouses not listed on the mortgage can remain in the home after the borrower dies

Cons

Borrower must maintain the house and pay property taxes and homeowners insurance

Forces you to borrower against the equity in your home, which could be a key source of retirement funds

Fees and other closing costs can be high and will lower the amount of cash available

Borrowers facing foreclosure can use a reverse mortgage to pay off the existing mortgage, potentially stopping the foreclosure