A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), is a loan that allows homeowners to access the equity they’ve earned in their home in exchange for cash. The catch is that, like a traditional mortgage, the homeowner must use their home as loan collateral.
In this post, we’ll go into further detail to explain how reverse mortgages work, their pros and cons, and the reverse mortgage requirements to consider before you apply. Read on for an in-depth look at reverse mortgages, or use the links below to navigate throughout the post.
- What is a Reverse Mortgage?
- Requirements to Apply for a Reverse Mortgage
- What Can a Reverse Mortgage be Used for?
- Will a Reverse Mortgage Calculator Tell You How Much You’d Get?
- How Much Does a Reverse Mortgage Cost?
- Reverse Mortgage Pros and Cons
- Final Notes
What is a Reverse Mortgage?
A reverse mortgage allows qualifying homeowners who are 62 years or older to borrow money from a lender by accessing their home equity. Reverse mortgages require homeowners to use their home as collateral like they would with a traditional mortgage.
But, unlike a traditional mortgage, the borrower does not need to make monthly payments on the loan. Instead, the reverse mortgage can be paid off after the homeowners no longer live at this residence. This, and because the loan balance goes up—not down—over time is where they get the “reverse” part of their name.
Now that you know more about how a reverse mortgage works, let’s take a look at the reverse mortgage requirements to consider before you think about applying.
Requirements to Apply for a Reverse Mortgage
So, can anyone take out a reverse mortgage? The short answer is: no. Like any other kind of loan, there are certain prerequisites you must meet in order to be approved for a reverse mortgage. Some of these, like the reverse mortgage age requirement, apply to reverse mortgages in general, but there are also criteria, like credit score or income requirements, that are specific to lenders.
The following are standard reverse mortgage requirements:
- You must be 62 years or older.
- Your home must be your primary residence.
- You must either own your home completely (no mortgage), or have a low mortgage balance.
- You may not have any delinquent federal debt (i.e. federal income taxes or federal student loan debt).
- At the end of your loan, you must plan to set aside a part of the reverse mortgage funds or have enough of your own money to cover recurring property payments.
- Your home must be in good condition—lenders may recommend certain repairs that must be made prior to loan approval.
- You must enrol in a HUD-approved reverse mortgage counselling program to learn about the benefits and implications of reverse mortgages and their alternatives.
What Can a Reverse Mortgage be Used for?
A reverse mortgage can be used to help supplement retirement income, cover unexpected medical bills, make necessary home repairs, to subsidize travel expenses, and more.
While there is no exact maximum reverse mortgage loan amount, there is a cap to how much of the value of a home can be lent from a reverse mortgage, which would in turn impact the maximum potential loan amount. The maximum reverse mortgage cap you can borrow against for the government-insured Home Equity Conversion Mortgage (HECM) is $726,525, even if your home is appraised at a higher rate.
Will a Reverse Mortgage Calculator Tell You How Much You’d Get?
Yes, reverse mortgage calculators can be a useful tool to help you estimate how much cash you may be able to access with a reverse mortgage. With that said, it’s important to make sure you consider the associated service costs involved with the process, Understanding all of the costs will help you better prepare and calculate your reverse mortgage total. On that note, let’s take a look at the reverse mortgage fees you may need to account for.
How Much Does a Reverse Mortgage Cost?
Reverse mortgage costs vary based on the lender you work with and factors unique to your financial situation. Below, we’ll break down how reverse mortgage fees work according to the US Department of Housing and Urban Development (HUD) and the typical cost values associated with some of the most common fees.
An origination fee is a common fee that’s used to compensate the lender for processing your loan—in this case, your reverse mortgage. Lenders charge between 2.5% or 2% of the first $200,000 of your home’s value. Additionally, lenders can charge an extra 1% of the amount exceeding the $200,000. However, origination fees for HECM loans are capped at $6,000.
Lenders or their representatives provide maintenance over the life of the HECM. Servicing means issuing account statements to you, disbursing loan proceeds and ensuring that you keep up with loan conditions. This can include paying real estate taxes and insurance premiums for hazards. If the loan has an annual adjustment rate or has a fixed interest rate, lenders can charge a monthly service fee of no more than $30. If the interest rate is adjustable, the monthly servicing fee cannot exceed $35.
Third-party charges and appraisal fees
Appraisal fees, title search and insurance, surveys, inspections, recording fees, mortgage taxes, and credit checks are typically handled by third-party vendors. These fees can vary based on the vendor you’re working with, where you live, and more.
Reverse mortgage interest rates tend to be on the higher side, so it’s important to consider how these rates will impact your overall loan balance when it’s time to pay off your loan. According to 2021 data, the current average interest rate for fixed-rate reverse mortgages is 3.06% and 2.07% for variable-rate mortgages.
Reverse Mortgage Pros and Cons
Like all mortgages and other loan types, reverse mortgages have several pros and cons to consider within the context of your own finances. If you are considering applying for a reverse mortgage in the near future, make sure to take a look at the following:
- Pro: Seniors can tap into their home equity to help fund their retirement, cover medical bills, make home repairs, and more.
- Pro: Reverse mortgage funds are considered tax-free and it does not impact your Medicare or Social Security income.
- Con: Because your home is used as loan collateral, not keeping up with the monthly fees could result in you losing your home.
- Con: Eventually, between the interest and other expenses, the debt could exceed the market value of the house. If you want the house to be inherited by your children, they may end up with a hefty bill.
- Con: Reverse mortgage scams are relatively prevalent, so it’s important to keep your wits about you if you plan to proceed. The Consumer Financial Protection Bureau specifically warns consumers against scams targeting veterans and some involving contractors who approach you to suggest reverse mortgages to pay for home repairs.
Reverse mortgages, like any major financial decision, require a lot of thought and planning. Before moving forward with this type of loan, consider the reverse mortgage pros and cons, costs, and other variables discussed in this post.