What Is a Reverse Mortgage?

A reverse mortgage is a type of home loan that allows homeowners who qualify to convert a portion of the equity in their homes to cash. Homeowners often choose to use the proceeds from a reverse mortgage to:

• Supplement social security and/or retirement income
• Pay medical bills not covered by insurance
• Make home improvements, or
• Avoid foreclosure.

Home Equity Conversion Mortgages (HECMs)

The Home Equity Conversion Mortgage (HECM), which is insured by the federal government, was one of the first types of reverse mortgages. It is the most common type of reverse mortgage available, accounting for around 90% of the total market.

Who Qualifies for a Reverse Mortgage?

Reverse mortgages are only available to homeowners who are 62 years of age or older. Borrowers must own their homes outright or owe very little on their existing mortgages. If there is an existing mortgage, a portion of the reverse mortgage proceeds must be used to pay off that mortgage. The property securing the reverse mortgage must be the borrower’s primary residence.

Benefits of Reverse Mortgages

One of the biggest advantages of a reverse mortgage is that the borrower does not have to make any monthly mortgage payments during the life of the loan. For many seniors, this fact alone makes a reverse mortgage more attractive than other types of loans, such as a home equity line of credit or a second mortgage. In fact, reverse mortgages don’t need to be repaid until the borrower does one of the following:

• Dies
• Sells the property (or transfers title)
• Moves to a different primary residence, or
• Defaults (for example, fails to maintain homeowners insurance on the property, pay property taxes, or make necessary repairs).

Another benefit of reverse mortgages is that they are non-recourse loans. This means that if the borrower defaults, the lender may foreclose on the borrower’s home but cannot pursue any collection efforts (including seeking a deficiency judgment) against the borrower.

Other benefits of reverse mortgages include the following:

• Because monthly mortgage payments are not required, many reverse mortgages have no income requirements.
• The proceeds of a reverse mortgage are generally not taxable.
• You may be able to choose to receive the proceeds of your reverse mortgage as a lump sum, line of credit, or monthly cash advance.

Disadvantages of Reverse Mortgages

One of the biggest disadvantages of a reverse mortgage is that once the loan becomes due and payable as a result of the borrower's death, the borrower’s heirs must:

• Repay the debt
• Sell the property for at least 95% of the appraised value with the net proceeds of the sale to be applied towards the mortgage balance (or an heir may satisfy the debt by paying 95% of the current appraised value), or
• deed the property to the lender.

Because the loan is non-recourse, there is no chance of a deficiency judgement.

Other disadvantages of reverse mortgages include the following:

• Most reverse mortgages have an adjustable rate, which means that the interest rate may go up.
• Interest on a reverse mortgage is not tax deductible until the loan is repaid.
• Reverse mortgages can be more expensive than other types of home loans. There can be significant upfront fees (origination fees, mortgage insurance premiums, and closing costs), as well as ongoing servicing fees during the term of the mortgage.
• The amount owed under a reverse mortgage grows over time. Because the borrower never makes any monthly payments on a reverse mortgage, any loan funds that are advanced or interest that is charged is added to the amount of the outstanding debt.

Be a Savvy Borrower

Additional information on reverse mortgages can be found on the Department of Housing and Urban Development’s website page on Home Equity Conversion Mortgages for Seniors  and the AARP’s page on Reverse Mortgages. Before taking out a reverse mortgage on your home, you may also want to consult with a trusted financial advisor or real estate attorney.