Reverse Mortgages offer a practical way for many retirees to access additional funds to cover living expenses and medical costs or maintain their desired lifestyle. Without regular income, finding that extra cash can be tough. A reverse mortgage is a solution that converts your home equity into cash and allows you to stay in your home. Knowing how to choose the best reverse mortgage for your home type is crucial.
This guide will cover reverse mortgage meaning, types, costs, eligibility and home types. Whether you’re considering a reverse mortgage in California or elsewhere, this article will cover the basics.
What Is a Reverse Mortgage?
A reverse mortgage is a loan that allows senior homeowners to borrow against their home equity. The loan is repaid when the borrower dies, sells the home or moves out. This type of loan can be a lump sum, line of credit or monthly payments. It gives you financial flexibility but reduces the home equity for your heirs. You can use a reverse mortgage calculator to estimate how much you may qualify for based on your home’s value.
Types of Reverse Mortgages
There are three types of reverse mortgages offered by different reverse mortgage companies:
Single-purpose Reverse Mortgage
- Offered by some state and local governments or non-profits.
- The least expensive but limited in availability and restricted to specific uses (e.g., home repairs or property taxes).
Federally Insured Home Equity Conversion Mortgage (HECM)
- The most common type of reverse mortgage backed by the Federal Housing Administration (FHA).
- Higher upfront costs due to mortgage insurance premiums (MIP) but flexible payment options like a lump sum, line of credit or monthly payments.
- Available in all states, including California.
Proprietary Reverse Mortgage
- Offered by private lenders and not insured by the federal government.
- No MIP, but it can be more expensive in fees and interest rates.
- Available to owners of higher value homes.
Costs of Reverse Mortgages
Reverse mortgages have various costs, some of which have changed in 2024. If you’re considering one, you need to factor in:
- Origination Fees: Capped at $6,000 but typically range from 2% of the first $200,000 of the home’s value to 1% on the balance.
- Mortgage Insurance Premium (MIP): For HECMs, borrowers pay an initial MIP of 2% of the loan amount and an annual MIP of 0.5%. This protects both the borrower and the lender.
- Interest Rates: Variable rate reverse mortgages are common for lines of credit, fixed rates for a lump sum. In 2024, reverse mortgage rates range from 3.5% to 6% depending on the lender and market conditions.
- Closing Costs: Appraisals, title searches and legal fees, which range from $2,500 to $4,000.
- Servicing Fees: Some lenders charge fees for ongoing maintenance of the loan, like distributing funds and monthly statements.
Learn more: How High Mortgage Rates Affect Home Buying
Eligibility Requirements
Not every retiree qualifies for a reverse mortgage. Here are the basic requirements, especially if you’re looking into reverse mortgages in California and other states:
- The borrower must be 62 years old or older.
- The home must be the primary residence.
- The homeowner must have significant equity in the home (at least 50%).
- The home must meet FHA property standards for HECMs.
- The borrower must continue to pay property taxes, homeowner’s insurance and any HOA fees and maintain the home.
How to Qualify for a Reverse Mortgage
To qualify for a reverse mortgage in 2024:
- Age: You or your spouse must be at least 62 years old.
- Home Ownership: You must own the home outright or have a low mortgage balance that can be paid off with the reverse mortgage proceeds.
- Property Type Single-family homes, FHA-approved condos, townhouses, manufactured homes (with permanent foundations), multi-unit properties (up to 4 units, one unit occupied by the borrower).
- Credit and Income: No income or credit requirements but lenders will assess your ability to pay property taxes, insurance and maintenance costs.
How Reverse Mortgages Work
- Application: The borrower contacts a lender to start the process and the home’s value, equity and eligibility are evaluated.
- Counseling: HUD requires all applicants for an HECM to receive counseling from a government-approved counselor to ensure they understand the loan terms.
- Loan Approval and Payment: Once approved the borrower can choose how to receive payments—lump sum, line of credit or monthly installments.
- Repayment: Repayment is deferred until the borrower dies, sells the home or permanently moves out. At that point the home is sold and the loan is paid off. Any remaining equity goes to the borrower or heirs.
- Non-Recourse Clause: One of the benefits of a reverse mortgage is that even if the loan balance exceeds the home’s value, neither the borrower nor their heirs will owe more than the home’s market value at the time of sale.
Learn more: Single women should know about the home buying process
Reverse Mortgages for different home types
Here’s how reverse mortgages work for different home types:
Single-Family Homes
- Eligibility: Must be the primary residence and meet FHA minimum property standards.
- Benefits: Get a steady income without selling the home.
- Drawbacks: Equity decreases over time and affects inheritance.
Multi-Unit Properties
- Eligibility: The borrower must own and live in one of the units.
- Benefits: Larger loan amounts can be borrowed based on property value.
- Drawbacks: Not good for single family homes with little equity.
Manufactured Homes
- Eligibility: Must be built after 1976 and on a permanent foundation.
- Benefits: Financial stability, no relocation for retirees.
- Drawbacks: Harder to qualify due to stricter property standards.
Condos
- Eligibility: Must be in an FHA approved community.
- Benefits: Get a steady income and flexibility to stay in the home.
- Drawbacks: FHA’s strict requirements make it harder to qualify and higher upfront costs reduce available equity.
Reverse Mortgage vs HELOC
When comparing a reverse mortgage vs a HELOC (Home Equity Line of Credit) there are:
How Interest Rates Affect Your Reverse Mortgage
Interest Rate Sensitivity: With interest rates fluctuating in 2024, borrowers should be aware that variable rate reverse mortgages could increase borrowing costs over time and reduce equity faster. Monitor current reverse mortgage rates and the long term impact of rising interest rates.
Impact on Heirs: Reverse mortgages can reduce the inheritance to family members. Make sure your heirs know that unless they pay off the loan, they may lose the home. Have an open conversation with your family about the long-term effects of this decision.
Counseling: Reverse mortgage counseling is required for HECMs but it’s also important to get independent financial advice to make sure you understand the long term implications. A reverse mortgage counselor can guide you through the process but an independent financial advisor will give you a broader perspective on how this fits into your overall financial plan.
Learn more: How to Afford a Second Home Without Breaking the Bank.
FAQs
No, reverse mortgage payments are loan proceeds, not income, so they are not taxable. But you still have to pay property taxes.
Yes, you can pay off the loan at any time with no penalty, either by selling the home or using other funds. Most loans are paid off when the borrower moves out or dies.
The home is sold and the proceeds go to the lender to pay off the loan. Any remaining funds go to the heirs. If the loan is more than the home’s value, FHA insurance covers the shortage.
As the loan balance grows due to interest and fees the equity in the home decreases. Nicholas McMillan, founder and owner of Hire Realty LLC, says “if the loan balance becomes greater than the home’s current value, the heirs don’t have to pay back the difference because of non-recourse protections.”
Mike Otranto, President of Acquisitions at Wake County Home Buyers, says “if the borrower or their heirs sell the home to pay off the reverse mortgage, there will be little to no equity left”.
While reverse mortgages are legitimate financial products, scammers do exist. Always work with a reputable lender and get a HUD-approved reverse mortgage counselor.
Conclusion
Reverse mortgages can be a powerful tool for retirees looking to tap into home equity. But they are not for everyone. Before getting a reverse mortgage consider all other options, selling the home, downsizing or getting a HELOC. Always get advice from a financial professional and involve your family in the decision making process so a reverse mortgage fits your goal.
Sources:
Federal Housing Administration –
(https://www.hud.gov/program_offices/housing/sfh/hecm/hecmhome)
U.S. Department of Housing and Urban Development (HUD) –
(https://www.hud.gov/program_offices/housing/sfh/hecm/hecmabou)
Nicholas McMillan, Hire Realty LLC – For insights on non-recourse protections.
Mike Otranto, Wake County Home Buyers – For his insights on reverse mortgage impacts on inheritance.
Reverse Mortgage Lenders Association (NRMLA) – (https://www.nrmlaonline.org)
