Reverse mortgages is a way for homeowners ages 62 and older to leverage the equity in their home. With a reverse mortgage, a homeowner who owns their home outright — or at least has considerable equity to draw from — can withdraw a portion of their equity without having to repay it until they leave the home.

You may be wondering why anyone would want to borrow against a home they worked hard to pay off. Here’s how reverse mortgages work, and what homeowners considering one need to know.

• What is Reverse Mortgages?
• How do Reverse Mortgages Work?
• What are the 3 Types of Reverse Mortgages?
• Reverse Mortgage Rates
• Reverse Mortgage Example
• What is the Downside to Reverse Mortgage?
• AARP Reverse Mortgage
• How Much Money do you Get from a Reverse Mortgage?
• Is a Reverse Mortgage ever a good Idea?
• How long does it take to get Money from a Reverse Mortgage?
• Can you lose your house with a Reverse Mortgage?
• What type of Home is not Eligible for a Reverse Mortgage?
• Who is not Eligible for a Reverse Mortgage?
• What Happens if I Outlive my Reverse Mortgage?
• What is the Best Reverse Mortgage on the Market
• Which is better a Home Equity loan or a Reverse Mortgage?
• What is the Difference Between a Mortgage and a Reverse Mortgage?
• What is a Reverse Mortgage Line of Credit?

What is Reverse Mortgages?

A reverse mortgage is a type of loan that allows homeowners ages 62 and older, typically who’ve paid off their mortgage, to borrow part of their home’s equity as tax-free income. Unlike a regular mortgage in which the homeowner makes payments to the lender, with a reverse mortgage, the lender pays the homeowner.

Read Also: Cash Budgeting as a Basis for Decision Making

Homeowners who opt for this kind of mortgage don’t have a monthly payment and don’t have to sell their home (in other words, they can continue to live in it), but the loan must be repaid when the borrower dies, permanently moves out or sells the home.

Supplementing retirement income, covering the cost of needed home repairs or paying out-of-pocket medical expenses are common and acceptable uses of reverse mortgage proceeds, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.

“In each situation where regular income or available savings are insufficient to cover expenses, a reverse mortgage can keep seniors from turning to high-interest lines of credit or other more costly loans,” McClary says.

One of the most popular types of reverse mortgages is the Home Equity Conversion Mortgage (HECM), which is backed by the federal government.

How do Reverse Mortgages Work?

When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity.

The money you get usually is tax-free. Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.

There are three kinds of reverse mortgages: single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits; proprietary reverse mortgages – private loans; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs).

If you get a reverse mortgage of any kind, you get a loan in which you borrow against the equity in your home. You keep the title to your home. Instead of paying monthly mortgage payments, though, you get an advance on part of your home equity.

The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home.

Here are some things to consider about reverse mortgages:

• There are fees and other costs. Reverse mortgage lenders generally charge an origination fee and other closing costs, as well as servicing fees over the life of the mortgage. Some also charge mortgage insurance premiums (for federally-insured HECMs).
• You owe more over time. As you get money through your reverse mortgage, interest is added onto the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time.
• Interest rates may change over time. Most reverse mortgages have variable rates, which are tied to a financial index and change with the market. Variable rate loans tend to give you more options on how you get your money through the reverse mortgage. Some reverse mortgages – mostly HECMs – offer fixed rates, but they tend to require you to take your loan as a lump sum at closing. Often, the total amount you can borrow is less than you could get with a variable rate loan.
• Interest is not tax deductible each year. Interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.
• You have to pay other costs related to your home. In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. And, if you don’t pay your property taxes, keep homeowner’s insurance, or maintain your home, the lender might require you to repay your loan. A financial assessment is required when you apply for the mortgage. As a result, your lender may require a “set-aside” amount to pay your taxes and insurance during the loan. The “set-aside” reduces the amount of funds you can get in payments. You are still responsible for maintaining your home.
• What happens to your spouse? With HECM loans, if you signed the loan paperwork and your spouse didn’t, in certain situations, your spouse may continue to live in the home even after you die if he or she pays taxes and insurance, and continues to maintain the property. But your spouse will stop getting money from the HECM, since he or she wasn’t part of the loan agreement.
• What can you leave to your heirs? Reverse mortgages can use up the equity in your home, which means fewer assets for you and your heirs. Most reverse mortgages have something called a “non-recourse” clause. This means that you, or your estate, can’t owe more than the value of your home when the loan becomes due and the home is sold. With a HECM, generally, if you or your heirs want to pay off the loan and keep the home rather than sell it, you would not have to pay more than the appraised value of the home.

What are the 3 Types of Reverse Mortgages?

There are different types of reverse mortgages, and each one fits a different financial need.

1. Home Equity Conversion Mortgage (HECM)

The most popular type of reverse mortgage, these federally-insured mortgages usually have higher upfront costs, but the funds can be used for any purpose. Although widely available, HECMs are only offered by Federal Housing Administration (FHA)-approved lenders, and before closing, all borrowers must receive HUD-approved counseling.

2. Proprietary reverse mortgage 

This is a private loan not backed by the government. You can typically receive a larger loan advance from this type of reverse mortgage, especially if you have a higher-valued home.

3. Single-purpose reverse mortgage

This mortgage is not as common as the other two, and is usually offered by nonprofit organizations and state and local government agencies. Borrowers can only use the loan (which is typically for a much smaller amount) to cover one specific purpose, such as a handicap accessible remodel, says Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a nonprofit debt counselor based in Sugar Land, Texas.

Reverse Mortgage Rates

The Department of Housing and Urban Development adjusted the insurance premiums for reverse mortgages in October 2017. Since lenders can’t ask homeowners or their heirs to pay up if the loan balance grows larger than the home’s value, the insurance premiums provide a pool of funds that lenders can draw on so they don’t lose money when this does happen.

One change was an increase in the up-front premium from 0.5% to 2.0% for three out of four borrowers and a decrease in the premium from 2.5% to 2.0% for the other one out of four borrowers. The up-front premium used to be tied to how much borrowers took out in the first year, with homeowners who took out the most—because they needed to pay off an existing mortgage—paying the higher rate.

Now, all borrowers pay the same 2.0% rate. The up-front premium is calculated based on the home’s value, so for every $100,000 in appraised value, you pay $2,000. That’s $6,000 on a $300,000 house.

All borrowers must also pay annual mortgage insurance premiums of 0.5% (formerly 1.25%) of the amount borrowed. This change saves borrowers $750 a year for every $100,000 borrowed and helps offset the higher up-front premium.

It also means the borrower’s debt grows more slowly, preserving more of the homeowner’s equity over time, providing a source of funds later in life or increasing the possibility of being able to pass the home down to heirs.

Reverse Mortgage Example

Allen is 70 and owns a home worth $250,000. His 401(k) lost significant value during the Great Recession. To provide a cushion, he takes reverse mortgages worth $150,000 and receives this as a lump sum so that he can roll the money into a new series of investments.

First Option: Over time the value of the mortgage grows to $200,000. Allen dies and leaves the house to his son. The value of the house hasn’t changed.

In this scenario, the lender has a claim over the house worth $200,000. In order for Allen’s son to claim the house, he would have to repay the $200,000 loan on the property. Otherwise, the lender will take the house and sell it at auction. It will keep the proceeds up to the value of the loan and will give the remaining $50,000 to Allen’s son.

Second Option: Over time the value of the mortgage grows to $200,000, however, the local community has collapsed. The house is now only worth $150,000. Allen wants to move.

In this scenario, reverse mortgages are worth more than the house itself. When Allen sells the house that mortgage will come due in entirety. The lender can only collect up to the value of the house. Allen sells the house and turns all the proceeds over to the lender.

What is the Downside to Reverse Mortgage?

Although a reverse mortgage enables an owner to tap into perhaps hundreds of thousands of dollars in home equity, there are several downsides to a reverse mortgage. Those include:

Various costs: Similar to a traditional mortgage, a lender typically charges several fees when you take out a reverse mortgage. Those can include a mortgage insurance premium, an origination fee, a servicing fee and third-party fees.

For an HCEM, the initial mortgage insurance premium is 2% of the loan amount; on top of that, you’ll pay an annual mortgage premium of 0.5%. You’ll also pay an origination fee of $2,500 or 2% of the first $200,000 of your home value (whichever is greater), plus 1% of the amount exceeding $200,000; origination fees cannot exceed $6,000.

Variable interest rates: Most reverse mortgages have variable interest rates, meaning the interest rate that determines how much is added to your loan balance each month fluctuates throughout the life of the loan.

No tax deduction: Interest paid on a reverse mortgage can’t be deducted on your annual tax return until the loan is paid off.

Less equity: A reverse mortgage can siphon equity from your home, resulting in a lower asset value for you and your heirs.

Potential home repairs: If your home isn’t in good shape, you might need to make repairs before you can qualify for a reverse mortgage.

Possible early repayment: Aside from when a homeowner dies or moves out, the reverse mortgage loan might need to be repaid sooner than expected if the owner fails to pay property taxes or homeowners insurance, or if the owner isn’t keeping up with home maintenance.

Medicaid eligibility. A reverse mortgage doesn’t affect your Medicare or Social Security benefits, but it might affect your eligibility for Medicaid benefits.

AARP Reverse Mortgage

The American Association of Retired Persons (AARP) is a large, independent, nonprofit organization dedicated to helping people ages 50-plus to achieve independence—including financial independence.

While the organization, which serves 37 million older Americans and counting, doesn’t offer reverse mortgage products directly, it does weigh in on them in some very important ways.

Here’s where AARP comes into play for retirees who may be looking into getting a reverse mortgage as a means to age in place.

What does AARP think of reverse mortgages?

AARP has expressed support for reverse mortgage products as a tool to help older Americans withdraw their home equity in retirement. While the organization does not actually offer reverse mortgages, it does offer some useful information on this type of loan in the event you are seeking more information from an independent third-party.

On its website, AARP has a section devoted to reverse mortgages, which can be found here.

If you are wondering what the term “non-recourse” means or are preparing for your reverse mortgage counseling session, AARP offers a glossary of reverse mortgage terms as well as a wealth of information and questions to ask yourself if you are considering a reverse mortgage.

AARP influences reverse mortgage policy

In addition to its third-party role in providing information about reverse mortgages, AARP also takes a policy role through its Public Policy Institute. Representatives from AARP often appear during congressional hearings to work with policy makers on reverse mortgage protections and availability.

Through its public policy arm, AARP has also published reverse mortgage reports and studies meant to guide decisions made regarding the federally-insured Home Equity Conversion Mortgage program.

This loan program, which insures reverse mortgages under the Federal Housing Administration, comprises the vast majority of reverse mortgages today and is sensitive to housing policy changes made in Washington D.C.

AARP works to protect reverse mortgage borrowers

As the largest senior advocacy group out there, AARP works to ensure that the financial products available to seniors are safe and are in the best interest of those who use them.

Those products include reverse mortgages. In the few cases where reverse mortgage borrowers have not been satisfied with their borrowing experience, AARP has come to the defense of those borrowers.

Most recently, this has taken place in the form of defense for non-borrowing spouses involved in reverse mortgage transactions.

Those non-borrowing spouses who are not on the home title at the time of the loan closing are not entitled to inherit the home once the borrowing spouse has passed away or moved from the home under policy set by the FHA.

Another recent example involved AARP’s urging the Federal Housing Administration to clarify the reverse mortgage “non-recourse” policy.

At AARP’s urging, FHA clarified that any non-borrowing spouse is allowed to purchase the home for fair market value in the case where a borrowing spouse passes away or leaves the home.

This important protection means that a reverse mortgage heir never has to repay more on the loan than the home is worth at the time of the home sale.

How Much Money do you Get from a Reverse Mortgage?

The amount of money you can get from a reverse mortgage depends upon a number of factors, according to Boies, such as the current market value of your home, your age, current interest rates, the type of reverse mortgage, its associated costs and your financial assessment.

The amount you receive will also be impacted if the home has any other mortgages or liens. If there’s a balance from a home equity loan or home equity line of credit (HELOC), for example, or tax liens or judgments, those will have to be paid with the reverse mortgage proceeds first.

“Regardless of the type of reverse mortgage, you shouldn’t expect to receive the full value of your home,” Boies says. “Instead, you’ll get a percentage of that value.”

Is a Reverse Mortgage ever a good Idea?

Are you short on cash, and in a situation where your home equity is your biggest asset? Some homeowners end up in a situation where they don’t have any other viable way to raise money for their daily living expenses. In this case, they may want to take out a reverse mortgage.

However, this action is not a decision to make lightly because it’s probably taken years of hard work to accumulate your home equity; taking out a reverse mortgage means spending a significant part of that equity on loan fees and interest.

A Solution for Long-Term Problems

To qualify for a reverse mortgage, you must either own your home outright or be close to paying it off. You need to have enough equity that a reverse mortgage will leave you with a reasonable lump-sum monthly payment or line of credit after paying off your existing mortgage balance (provided you still have one).

Getting quotes from three lenders and going through reverse mortgage counseling should give you a good idea of whether it can provide a long-term solution to your financial problems.

Explore how much you could get with each of the payment options available for reverse mortgages. If none of them can provide the liquidity or large up-front sum you need, you’re probably better off avoiding this complicated loan. There may be a better financial solution to your current predicament.

For example, selling your home would allow you to cash out all of your equity, rather than just a percentage of it (as is the case with a reverse mortgage). Renting or moving in with a family member might be a better solution. If you end up taking out a reverse mortgage and then find yourself facing the same financial problems just a few years later, you might regret the time and energy you put into getting a reverse mortgage.

You Don’t Plan to Move

You should plan on remaining in your home for the near future if you take out a reverse mortgage. To begin with, a reverse mortgage comes with high up-front costs. There are lender fees, such as the origination fee—which can be as high as $6,000—depending on your home’s value.

Upfront mortgage insurance is equal to either 0.5% or 2.5% of your home’s appraised value, depending on the reverse mortgage payment plan you choose. And then there are the closing costs, such as title insurance, a home appraisal, and a home inspection.

It doesn’t make sense to pay this if you are going to move in a few years. Furthermore, if you move, you’ll have to repay the mortgage. Depending on what you’ve spent of the cash you obtained by taking out a reverse mortgage, you may not be able to do that. The worst-case scenario is that you’ll be left without a place to live.

You Can Afford Ongoing Costs

Keeping up with your property taxes, homeowner’s insurance, and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable.

If you don’t pay your property taxes for long enough, the county tax authorities can place a lien on your home, take possession, and sell it to recoup the taxes owed. The tax authority’s claim to your property supersedes the lender’s. So, if you don’t pay your property taxes, you’re putting the lender’s collateral (your house) at risk.

Not paying your homeowner’s insurance premiums also puts the lender’s collateral at risk. If your house burns down, there’s no insurance to pay the costs of rebuilding. Your lender doesn’t want to get stuck with a burned-out shell of a home that isn’t worth nearly what you owe on the reverse mortgage.

Not keeping up with home maintenance also causes your home to lose value. If you don’t replace a failing roof, for example, your home could end up with extensive water damage after it rains or snows. Prospective buyers would pay a lower price than they would for similar houses in good repair in your neighborhood.

The need to spend money to replace the roof and fix the water damage to return the home to a good condition may deter buyers altogether.

Your Spouse Is 62 or Older

Any borrower on a reverse mortgage must be at least 62 years old. If you’re married and your spouse isn’t yet 62, getting a reverse mortgage is not ideal. While new laws protect your non-borrowing spouse from losing the home if you die first, they can’t receive any more reverse mortgage proceeds after you’re gone.

If your reverse mortgage is set up as either a monthly income stream or a line of credit, your spouse might lose access to a source of income they were depending on. Also, reverse mortgage proceeds are based on the youngest spouse’s age (whether that person is on the loan or not). The younger that age is, the lower the amount you can initially borrow.

If you and your spouse are each at least 62, getting a reverse mortgage might be a good choice. Use an online calculator that is focused on reverse mortgages and talk to prospective lenders or your reverse mortgage counselor about how the value of proceeds you will get changes as you get older.

How long does it take to get Money from a Reverse Mortgage?

We have had many that have been completed in this time-frame but I have to be honest with you, all the stars have to align just right or it will not close in the 30 days and especially at this time of the year. 

Every borrower has to have the HUD mandated counseling before we can do very much with your loan and many states also have counseling requirements.  If your counseling has not been completed, then you have to get an appointment and that is sometimes easier to do than others.

Right after HUD made the announcement that they were going to change the program in 9/2017, counseling agencies were jammed and appointments were harder and harder to get.  It is much easier to get an appointment now, but in some states, there are other requirements such as no application until after the counseling or as in CA, a 7 day cooling off period during which time the lender can do nothing on the loan.

That means if you live in California or one of these other states and it takes just 2 days to get an appointment, you are dead in the water until after you receive the counseling and in California, that’s 9 days into that 30 day time frame already and the lender has not been able to really start the loan by law.

Your Location Matters 

Then the location can also work against you with other services.  Some parts of the country are notorious for taking extremely long on appraisals.  Washington, Oregon, and Colorado fall into these categories.  It can take 4 weeks just to get an appraisal back.  Or if you live anywhere in which you are considered rural, or there are few FHA approved appraisers in the area or very few recent sales of similar homes, it can take appraisers just as long in other states as well.

Then you have to consider the time of year.  We have holidays and vacations with which to contend and even if there is no one out at the lender’s shop, we work with appraisers, title companies, escrow, attorneys and other third party services that may have staff out at their shops that affect their service levels this time of the year.

We just came out of Hurricane season and were greatly impacted by two massive hurricanes as well as the many wildfires throughout the western United States.

Even if you don’t live in an area affected by the disasters, lenders and other service providers are bogged down by loans having to be reviewed and re-reviewed and held up just before closing.  The normal flow of things is interrupted at such times and it taxes the staffs when they have to now work on each loan two, three or even four more times and that slows down their ability to handle the same volumes.

The loan can close in 30 days

And finally, through it all, when the pieces do fall into place (the borrower does have their counseling already done, they return their signed application without delay and the service providers hit no delays), we have loans that do close in less than 30 days quite often.

The problem is, we can’t tell you which loans in advance will be those lucky loans.  We never know when an old lien will show up on your title that might take a while to track down the lender and remove, when the appraiser will call us and tell us that he/she can’t find any sales and it “going to take a while”, when HUD will suddenly make an unannounced change that sends the entire industry into a frenzy (as it did in September of this year) or when a natural disaster will strike.

Therefore we always like to be honest with folks and tell them that yes, the loan can close in 30 days and many do but you are better off planning for 45 and even then, if some unforeseen circumstances arise that delay your title or appraisal, it could take longer.

If 30 days is a drop dead date before something catastrophic happens, we would advise a Plan “B”.

Can you lose your house with a Reverse Mortgage

Many seniors are taking advantage of the equity in their home by taking out a reverse mortgage. In a reverse mortgage, you use your equity to take out a loan that is paid by the proceeds of the sale of your home. Because you still own your home in a reverse mortgage, there aren’t many ways to lose ownership, unless you fail to maintain three key components of maintaining your home’s legal standing.

Losing Your Home

There are few ways in which you can lose your home if you get a reverse mortgage. The key is to make sure you are current on the items that you must continue to pay during the terms of the reverse mortgage. That includes paying your property taxes, your home insurance and any necessary home repairs.

If you fall behind, or fail to pay, any of these items, your lender has the option to accelerating your reverse mortgage and making the whole sum due, which could leave you at risk of foreclosure. One way to avoid this issue is to maintain an escrow account for these expenses.

Education

Some organizations, such as AARP and the Reverse Mortgage Times, provide a wealth of information on reverse mortgages. AARP allows you to download a PDF guide to reverse mortgages and access a catalog of online articles designed to give you advice and up-to-date information on reverse mortgages.

The Reverse Mortgage Times offers a 23-page web brochure on the basics of reverse mortgages and key decisions you face to determine whether you should get one. Additionally, FHA, the country’s largest reverse mortgage underwriter, requires counseling for you before approving the loan. Understanding your obligations in a reverse mortgage is key to avoiding issues like loan acceleration and foreclosure.

Counselors

If you feel as if you need help evaluating your need for a reverse mortgage, there are ways to get help. Contact either a housing counselor or a financial adviser who has experience dealing with reverse mortgages.

They should make you aware of your options, including viable financing alternatives, the pros and cons of taking out a reverse mortgage and how it could impact those you leave behind. The U.S. Department of Housing and Urban Development employs housing counselors that can be contacted by phone or email.

Sales Pressure

The Federal Trade Commission (FTC) cautions that some companies may try to pressure you into purchasing other products when attempting to apply for a reverse mortgage. These products can include annuities and insurance for long-term care. The FTC says that these products are not necessary to secure a reverse mortgage.

Your home insurance and residential taxes are the only things you must keep current during the terms of your reverse mortgage. The FTC recommends thoroughly researching any offer that requires you to undertake other products when applying for a reverse mortgage, and to walk away if the offer makes you feel uncomfortable.

Fraud

Be sure you are dealing with reputable companies when you apply for a reverse mortgage. AARP reported on a 2009 scam carried out by a Texas company that had previously been fined by the federal government for posing as a government agency to collect data on older Americans for the purpose of passing that information to salesmen and other third parties.

Posing as a government agency is a federal crime, and any reverse mortgage lender is required to follow HUD rules. If you suspect that your reverse mortgage lender is violating the law, you should report them to the FTC or to your state’s attorney general.

What type of Home is not Eligible for a Reverse Mortgage

Not only must the potential client qualify, but so must their home as well. For one, the home must be your primary residence, and there must be sufficient equity in the home. Also, your home must be considered an eligible property. Wondering if your home makes the cut?

If it is one of the kinds of homes listed below, it will not be eligible for a reverse mortgage.

1. Second homes.
2. Properties with more than 50 acres.
3. Condominium conversions.
4. Properties owned by Hawaiian Homelands (HHL).
5. Investment properties.
6. Cooperatives.
7. Commercially or agriculturally zoned homes.
8. Homes that are dilapidated or in very poor condition.
9. Any properties above four units.
10. More than four properties sharing one well.

Don’t forget, even if your home does qualify, it must go through the appraisal process. The appraisal will determine the actual market value of the home. It is important to know the market value of the home because that helps determine how much you will get in reverse mortgage proceeds. If your home appraises low, a reverse mortgage may not be an advantageous option for you.

If you’re still wondering if you home qualifies or you have questions about your specific living situation, it is best to call one of our licensed specialists. They can answer your questions and provide more customized information based on a conversation about your house.

It is important to know that, if your home does qualify and you get a reverse mortgage, you will still remain the owner of your home. That means you get to keep the home you love – and you are still responsible for paying your property taxes, homeowners insurance, and home maintenance costs.

Who is not Eligible for a Reverse Mortgage?

All borrowers on the home’s title must be at least 62 years old. The older you are, the more funds you can receive from a Home Equity Conversion Mortgage (HECM) reverse mortgage.

You must live in your home as your primary residence for the life of the reverse mortgage. Vacation homes or rental properties are not eligible.

You must own your home outright or have at least 50% equity in your home. Even if you owe some money on your existing mortgage, you may be eligible for a reverse mortgage. The funds from the reverse mortgage would first pay off your mortgage and satisfy any other eligible existing liens before you could use the funds for other things. Refinancing existing debt(s) with a reverse mortgage can help improve monthly cash flow.

You must meet with a Department of Housing and Urban Development (HUD)-approved reverse mortgage counselor prior to applying for a reverse mortgage. The reverse mortgage counselor will discuss how a reverse mortgage works and the associated costs. The goal of the counseling session is to make sure that potential borrowers fully understand and are comfortable with the process and the loan terms.

What Happens if I Outlive my Reverse Mortgage?

Waiting as long as you can to take out a reverse mortgage is one way to limit your chances of outliving the proceeds. The CFPB warns that younger retirees with longer life expectancies have a greater chance of using up all of their home equity with a reverse mortgage. This isn’t a problem if they are able to age in place—stay in their homes for life—but it is a problem if they want or need to move later on. 

Future increases in interest rates could decrease how much you can borrow even though you are older. Jack M. Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, studied the issue.

He found that a 62-year-old who waited until age 72 to get a reverse mortgage and who chose the line of credit payment plan could increase their credit line by 17% by waiting those 10 years if interest rates stayed the same. If interest rates doubled, however, that same borrower would have access to a 69% smaller line.

Thus it can actually make sense to take out a reverse mortgage line of credit plan as early as possible, then leave the line untouched for as long as possible to maximize its growth potential. 

Despite what some reverse mortgage advertisements lead seniors to believe, there are many ways to outlive the proceeds of a reverse mortgage. Before you or a loved one takes out this type of loan, it’s important to understand the circumstances under which a reverse mortgage may not provide financial security for life.

Use that knowledge whether to take this kind of loan and which plan makes the most sense and provides the best security.

What is the Best Reverse Mortgage on the Market

Reverse mortgage companies provide homeowners ages 62 and over with home equity conversion mortgages, or HECMs, that convert home equity into cash. The best reverse mortgage lender provides multiple options for tapping your home equity and solid educational resources focused on the lending process and reverse mortgage rates and costs.

A counseling session is mandated for all homeowners who apply for a reverse mortgage, but you will still most likely have questions. A good lender is prepared to answer questions and serve as a guide through the entire process.

1. Quontic Bank

In recent years, Quontic Bank, formerly a regional bank in the northeast, has expanded its digital footprint and does business in all 50 states. Its reverse mortgage options are limited to HECM, meaning you must meet all of the standard requirements for the FHA’s program.

As part of the process, Quontic will verify you have adequate assets to cover the necessary fees for the loan, including annual insurance payments, the money needed to maintain the home, and enough to cover property and other taxes. The bank provides easy access to loan officers who can answer the questions of remote customers via phone, e-mail or live chat.

2. AAG

AAG, or American Advisors Group, is the most recognized reverse mortgage lender due to its advertising efforts. The brand clearly explains the different types of reverse mortgages to potential borrowers and provides specialists to help you review the different loans options.

A lump-sum payout is an option that provides 60% of your potential funding in the first year. This is an option that is best used for major unexpected expenses. A line of credit could appeal to you if you have a need for more funds, like a new vehicle purchase or home improvements, and would prefer not to tap into your traditional retirement accounts to pay for it.

Much like ORM, AAG also offers an in-house loan known as the jumbo reverse mortgage for properties outside the scope of FHA’s HECM program. The loan lets you tap up to $4 million in equity at a fixed rate. No mortgage insurance is required.

3. Longbridge

Longbridge Financial, LLC differentiates itself from competitors by offering easy-to-use tools, including a free quote calculator and scenario-based guides to answer the most common questions about reverse mortgages, such as, “What happens when the homeowner can no longer live in the home or dies?”

The answer is that the loan must be repaid. In many cases, the home is sold. If it sells for less than the amount owed on the reverse mortgage, the FHA insurance covers the difference, not the heirs. If it sells for more, the lender is paid back, and the estate receives the remainder.

Longbridge also provides a loan option for homes with a higher value along with the common HECM for purchase loan. With a for-purchase loan, you buy a new home with a down payment up to 50% of its purchase price and pay for closing. The HECM covers the balance and provides any remaining funds to you.

Going forward, you do not have to make monthly mortgage payments. Many homeowners who choose the option want to relocate to a different climate, move closer to children and other family members or need a home that meets new needs by providing accessibility options and other amenities.

4. All Reverse Mortgage Inc

All Reverse Mortgage Inc — also called ARLO — offers a variety of reverse mortgages including HECM’s, jumbo reverse, HECM purchase, proprietary reverse, HomeSafe reverse, Platinum reverse, and more. Using the ARLO calculator on its website, you can get information quickly and easily on what reverse mortgage you may qualify for.

If you meet the requirements of a reverse mortgage, you can apply over the phone or online. It can take 30 or more days to close a reverse mortgage with All Reverse Mortgage, which is pretty standard in the industry.

Depending on factors like age, current rates and type of reverse mortgage loan you can expect to receive anywhere from 40% to 60% of your home value. You may choose a line of credit with an adjustable-rate, a HECM (traditional or jumbo), a reverse mortgage for purchase if you’re buying a new home, and if your property exceeds FHA limits, ARLO offers a proprietary reverse mortgage option.

5. Finance of America Reverse

Also in business for 16 years, Finance of America Reverse’s website is user-friendly and thorough, offering loan options to accommodate various life goals you may have. You can then easily review each loan option, including detailed brochures.

For example, if you want to unlock the potential in your home’s equity the HECM mortgage option may be for you. This may allow you to achieve goals like paying off your existing mortgage, pay for in-home care, renovate, supplement income, cover medical expenses, stay in the home long-term, and more.

If you are looking for a new home whether to upsize, downsize, or just relocate, the Reverse for Purchase option is available. Finance of America Reverse also offers a HomeSafe option that includes a standard and jumbo reverse mortgage. If you are looking to increase cash flow or leverage your current equity to buy a new home, one of these options may be right for you.

Which is better a Home Equity loan or a Reverse Mortgage?

If you are a homeowner and at least 62 years old, you may be able to convert your home equity into cash to pay for living expenses, healthcare costs, a home remodel, or whatever else you need. This option is a reverse mortgage; however, homeowners have other options, including home equity loans and home equity lines of credit (HELOCs)..

All three allow you to tap into your home equity without the need to sell or move out of your home. These are different loan products, however, and it pays to understand your options so you can decide which is better for you.

Reverse Mortgage

A reverse mortgage works differently than a forward mortgage—instead of you making payments to a lender, the lender makes payments to you, based on a percentage of your home’s value. Over time your debt increases—as payments are made to you and interest accrues—and your equity decreases as the lender purchases more and more of it.

You continue to hold title to your home, but as soon as you move out of the home for more than a year, sell it, or pass away—or become delinquent on your property taxes or insurance or the home falls into disrepair—the loan becomes due. The lender sells the home to recover the money that was paid out to you (as well as fees). Any equity left in the home goes to you or your heirs.

Study carefully the types of reverse mortgages and make sure you choose the one that works best for your needs. Scrutinize the fine print—with the help of an attorney or tax advisor—before you sign on. Reverse mortgage scams often target older adults seeking to steal the equity of your home.

The FBI recommends not responding to unsolicited advertisements, being suspicious of people claiming they can give you a free home, and not accepting payments from individuals for a home you did not purchase.

Note that if both spouses have their name on the mortgage, the bank cannot sell the house until the surviving spouse dies—or the tax, repair, insurance, moving, or selling-the-house situations listed above occur. Couples should investigate the surviving-spouse issue carefully before agreeing to a reverse mortgage.

There can be other drawbacks, too, including high closing costs and the possibility that your children may not inherit the family home. Interest charged on a reverse mortgage generally accumulates until the mortgage is terminated.

Home Equity Loan

Like a reverse mortgage, a home equity loan lets you convert your home equity into cash. It works the same way as your primary mortgage—in fact, a home equity loan is also called a second mortgage. You receive the loan as a single lump-sum payment and make regular payments to pay off the principal and interest, which is usually a fixed rate. But unlike a reverse mortgage, you don’t have to be 62 to get one.

Home Equity Line of Credit (HELOC)

With a home equity line of credit (HELOC) you have the option to borrow up to an approved credit limit, on an as-needed basis. In that regard, a HELOC functions more like a credit card.

With a standard home equity loan you pay interest on the entire loan amount, but with a HELOC, you pay interest only on the money you actually withdraw.

Currently, the interest you pay on home equity loans and HELOCs is not tax-deductible unless you use the money for home renovations or similar activities on the residence that secures the loans. Before the Tax Cuts and Jobs Act of 2017, interest on home equity debt was all or partially tax-deductible. Note that this change is for tax years 2018 to 2026.

In addition—and this is an important reason to make this choice—with a home equity loan, your home remains an asset for you and your heirs. It’s important to note, however, that your home acts as collateral, so you risk losing your home to foreclosure if you default on the loan.

Key Differences

Reverse mortgages, home equity loans, and HELOCs all allow you to convert your home equity into cash. However, they vary in terms of disbursement and repayment, as well as requirements, such as age, equity, credit, and income. Based on these factors, here are the key differences among the three types of loans.

Disbursement

• Reverse mortgage: monthly payments, lump-sum payment, line of credit, or some combination of these
• Home equity loan: lump-sum payment
• HELOC: as-needed, up to a pre-approved credit limit—comes with a credit or debit card or a checkbook

Repayment

• Reverse mortgage (deferred repayment) loans are due as soon as the borrower becomes delinquent on property taxes or insurance or under other certain circumstances.
• Home equity loans involve monthly payments made over a set amount of time with a fixed interest rate.
• HELOCs involve monthly payments based on the amount borrowed and the current interest rate.

Age and Equity Requirements

• Reverse mortgage: must be at least 62 and must own the home outright or have a small mortgage balance.
• Home equity loan: no age requirement and must have at least 20% equity in the home.
• HELOC: no age requirement and must have at least 20% equity in the home

Credit and Income Status

• Reverse mortgage: no income requirements, but some lenders may check that you can make timely and full payments for ongoing property charges, such as property taxes and insurance,
• Home equity loan: a good credit score and proof of steady income sufficient to meet all financial obligations
• HELOC: a good credit score and proof of steady income sufficient to meet all financial obligations

Tax Advantages

• Reverse mortgage: none, until the loan terminates
• Home equity loan: for tax years 2018 through 2025, interest only tax deductible if the money was spent for qualified purposes—to buy, build, or substantially improve the taxpayer’s home that secures the loan
• HELOC: same as for a home equity loan

Reverse mortgages, home equity loans, and HELOCs all allow you to convert your home equity into cash. So how to decide which loan type is right for you?

In general, a reverse mortgage is considered a better choice if you are looking for a long-term income source and don’t mind that your home will not be part of your estate. However, if you are married, be sure that the rights of the surviving spouse are clear.

Either a home equity loan or a HELOC is considered a better option if you need short-term cash, will be able to make monthly repayments, and prefer to keep your home. Both have considerable risks along with their benefits, so review the options thoroughly before taking either action.

What is the Difference Between a Mortgage and a Reverse Mortgage?

With a standard mortgage a home buyer pays some percentage of the home value as a down payment, then pays off the home over time. Traditional mortgages can be structured as fixed rate or adjustable rate, and some loans can be designed around paying on principal or paying interest only.

Some investors chose to pay interest only to minimize the capital outlay, whereas it is much more common for the traditional home buyer to pay on the loan principal until the loan is paid off. Once the loan is paid off the home buyer owns the home.

Reverse Mortgages

In reverse mortgages, the homeowner already owns the home. A financial institution decides to pay cash to the homeowner for the equity built up in their home. When the homeowner dies or moves, the loan must be repaid by the borrower or their remaining family members.

It is common for the home to be sold off, and the proceeds used to pay down the amount owed on the reverse mortgage. Since interest accrues over time and many reverse mortgages are structured using monthly payments, the longer the homeowner lives the more of the home’s value goes toward paying off the reverse mortgage loan.

During a reverse mortgage the homeowner still owns the home, but must continue to maintain the house, pay taxes, and insure the home, or the loan can become due in full, forcing the homeowner to raise capital from friends and family or sell their home and move to another location.

Even if the homeowner lives longer than expected or the house value goes down the person getting a reverse mortgage can never owe more than their house is worth.

What is a Reverse Mortgage Line of Credit

So, when you have a reverse mortgage line of credit, you have money that is available to you — but you only accrue interest on the money you withdraw. So, the reverse mortgage line of credit acts as an excellent low cost back up source of funds.

In addition to being a great safety net option, other key benefits to a reverse mortgage line of credit include:

Growth: Not only are you not paying interest, but your untouched reverse mortgage line of credit can grow in value. Money in a reverse mortgage line of credit grows at the same rate as the interest accrued on the loan, including the .5% mortgage insurance premium. So, if the fully loaded interest rate on your reverse mortgage is 4.00%, then your line of credit will grow at 4.5% (4.0% + .5%).

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Unique: This growth is unique to reverse mortgage lines of credit — a HELOC for example does not grow.

Hedge Against Falling House Prices: The growth in a reverse mortgage line of credit is guaranteed — without withdrawals, your line of credit is guaranteed to grow.

This feature can be an interesting hedge to the potential of falling home prices.  If you think home prices will be stagnant or potentially fall, then a reverse mortgage line of credit allows you to lock in the current value of your home and continue to see your assets grow.

Conclusion

A reverse mortgage can be a help to homeowners looking for additional income during their retirement years, and many use the funds to supplement Social Security or other income, meet medical expenses, pay for in-home care and make home improvements, Boies says.

There are also flexible ways to receive the money from the reverse mortgage: a lump sum, a monthly payment, a line of credit or a combination.

Plus, if the value of the home appreciates and becomes worth more than the reverse mortgage loan balance, you or your heirs may receive the difference, Boies explains.

The opposite, however, can pose a problem: If the balance exceeds the home’s value, you or your heirs may need to foreclose or otherwise give ownership of the home back to the lender.

There are also potential complications involving others who live in the home with the borrower, and what might happen to them if the borrower dies. Family members who inherit the property will want to pay close attention to the details of what is necessary to manage the loan balance when the borrower dies.

“There are provisions that allow family to take possession of the home in those situations, but they must pay off the loan with their own money or qualify for a mortgage that will cover what is owed,” McClary says.

Additionally, while not all reverse mortgage lenders use high-pressure sales tactics, some do use them to attract borrowers.

“It is always best to receive guidance from a nonprofit agency that offers reverse mortgage counseling before signing a loan agreement,” McClary recommends. “Taking advice from a celebrity spokesperson or a sales agent without getting the facts from a trusted, independent resource can leave you with a major financial commitment that may not be best for your circumstances.”