How a Reverse Mortgage Works

An elderly couple sitting on the porch together

The following is presented for informational purposes only, and should not be construed as legal advice.

A reverse mortgage can be a tremendous help to seniors looking for additional income during their retirement years. But there are drawbacks, and the concept itself is somewhat complicated. As the baby boomer generation continues to ease into retirement, it’s very likely that the demand for reverse mortgages will only increase.

For those approaching retirement and considering their financial outlook, the following information can help you decide if a reverse mortgage is right for you.

What is a reverse mortgage?

A reverse mortgage (or Home Equity Conversion Loan, HECM) is a loan that a creditor takes out against your home, while you're still living in it. Despite the name, they aren't exactly the reverse of a traditional mortgage. The lender is not attempting to buy the property. Instead, the lender is simply loaning money which is secured by the home's equity. When the homeowner/borrower dies, permanently moves out, or sells their home, the reverse mortgage comes due and must be paid in full, usually with the proceeds from the sale of the property. Terms can vary, but some borrowers choose to get a lump sum payment, while others choose a line of credit or periodic payments.

Reverse mortgages are available from private lenders, from the U.S. Department of Housing and Urban Development (HUD), from some nonprofit organizations, and from some state and national government programs. Homeowners retain the title to their property, and therefore need to continue making insurance and tax payments. They are only available to homeowners aged 62 and older (spouses can be under 62 and have the option to maintain the loan after the primary borrower dies).

How much do you get for a reverse mortgage?

The amount of money you get from a reverse mortgage depends upon the current market value of your home. However, you shouldn’t expect to receive the full value of your home. Instead, you’ll likely get a percentage of that value.

Keep in mind that although you will no longer be required to make payments on your home, interest on your reverse mortgage will accrue every month. In time, the balance owed may even come to exceed the value of the home (especially if home values drop). In many cases, borrowers (or their surviving heirs) are not required to repay these overages, but that’s not a guarantee, so you’ll always want to make sure you fully understand the terms of the mortgage agreement.

Should I consider a reverse mortgage?

Many seniors benefit from taking out a reverse mortgage, however, it is a big decision that should be made carefully.

First, consider all of your options – there may be something less expensive that will work better. Reverse mortgages usually have up-front fees, so they aren’t always the best option in the short-term. Also, if you take out a reverse mortgage, you are giving up a measure of control over what is likely your most valuable asset.

Reverse mortgages are secured, so you may not want to use a reverse mortgage as a tool to pay down unsecured debt. In other words, you’ll need to take some time to consider whether or not you want to use your home equity. Talking to heirs or a financial planner might help you with the decision making process.

If you do decide to take out a reverse mortgage, do some research to find a highly rated lender that offers competitive rates. You will also need to attend a reverse mortgage counseling session offered by a HUD-approved agency.

Article updated July 2020.

Tagged in Mortgages and foreclosure, Seniors, Retirement

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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