A reverse mortgage is a type of loan that allows homeowners aged 62 or older to borrow against the equity in their home. Instead of making payments to a lender like a traditional mortgage, the lender pays the homeowner in the form of a lump sum, monthly payment, line of credit, or a combination of these.
Types of reverse mortgages
Single-purpose reverse mortgages: These are offered by some state and local government agencies, as well as non-profit organizations. They are typically the least expensive type of reverse mortgage and are designed for specific purposes such as paying for home repairs or property taxes.
Home Equity Conversion Mortgages (HECMs): These are the most common type of reverse mortgage and are insured by the Federal Housing Administration (FHA). They are available to homeowners aged 62 and older and can be used for any purpose. HECMs can be taken out as a lump sum, line of credit, or annuity.
Proprietary reverse mortgages: These are private loans that are backed by the companies that offer them. They are designed for high-value homes and are often used by homeowners who have substantial equity in their homes but may not qualify for a HECM due to lending limits. These types of reverse mortgages can have higher interest rates and fees compared to other types of reverse mortgages.
Home Equity Conversion Mortgage (HECM)
With a HECM, the homeowner receives payments from the lender based on the equity in their home. The loan does not have to be repaid until the homeowner no longer lives in the home, either because they have passed away or they have permanently moved out. At that point, the loan is typically repaid by selling the home, and any remaining equity is passed on to the homeowner's heirs.
HECMs are backed by the Federal Housing Administration (FHA) and are subject to certain requirements and limitations. For example, the amount of money a homeowner can borrow is based on factors such as their age, the value of their home, and current interest rates. Additionally, the homeowner must continue to pay property taxes, homeowner's insurance, and maintenance costs on the home.
What to know about HECMs
Eligibility: To be eligible for a HECM, you must be at least 62 years old and own your home outright or have a significant amount of equity in your home. You must also complete a counseling session with a HUD-approved counselor before obtaining a HECM.
Loan amount: The amount of money you can borrow with a HECM depends on factors such as your age, the value of your home, and current interest rates. The maximum loan amount for a HECM is currently $822,375.
Repayment: With a HECM, you do not have to make monthly mortgage payments. The loan is typically repaid when you sell your home or pass away. If you are no longer able to live in your home for more than 12 months (for example, if you move to a nursing home), the loan will also become due.
Costs: HECMs come with upfront costs such as an origination fee, mortgage insurance premium, and appraisal fee, as well as ongoing costs such as interest and servicing fees. These costs can add up quickly, so it is important to carefully consider whether a HECM is the right option for you.
Risks: Taking out a HECM can be risky, especially if you are not able to continue living in your home for an extended period of time. If you are unable to repay the loan, you could potentially lose your home.
How does a reverse mortgage work?
Reverse mortgages can be confusing. The easiest way to think about them is as an advance on your home’s eventual sale. The lender advances you the money, either in monthly payments, sporadic withdrawals or a lump sum, and when you pass on or sell your house, you’ll repay the loan — or your heirs will — out of your home’s sale proceeds.
During the course of your reverse mortgage, you won’t need to make payments to your lender (though you can if you prefer), but you will need to stay current on property taxes, insurance and homeowners association dues, as well as maintain the property. If you fail to meet these obligations, your lender could call your loan due or even foreclose on the house.
Reverse mortgage problems for heirs
Inheriting a home with a reverse mortgage attached to it can be challenging. Heirs must decide whether to pay off the reverse mortgage out of pocket (or with another loan) and keep the property or sell the home and use the sale proceeds to repay the balance.
Fortunately, if they do sell the home, they won't ever owe more than the home’s worth (at least on HECM loans). In the event the home sells for less than the total reverse mortgage balance that's due, FHA mortgage insurance will cover the difference.
How long do heirs have to pay off a reverse mortgage?
Heirs typically have 30 days to pay off the loan balance. In some cases, you may be able to request an extension of up to a year. A lender might grant this if you’re actively trying to sell the home or you’re working on obtaining financing (you’ll need to provide documentation). This information mainly applies to federally backed loans, though lenders may make exceptions for proprietary mortgages too.
If the heirs do not pay back the loan within the agreed-upon timeframe, the lender may foreclose on the home.