Understanding the basics
Understanding How a Reverse Mortgage Works
If you've started researching reverse mortgages, you've probably noticed that there is no shortage of information online. Unfortunately, not all of it is accurate, and much of it leaves out important details.
In brief
A reverse mortgage is a financial tool that allows eligible homeowners to access a portion of the equity they have built in their home while continuing to live there. For some people, it can provide greater financial flexibility during retirement. For others, another solution may make more sense.
The key is understanding how the program works before deciding whether it fits your needs.
The starting point
What Is Home Equity?
Before discussing reverse mortgages, it helps to understand home equity.
Home equity is simply the difference between what your home is worth and what you still owe on any existing mortgage.
For example, if your home is worth $500,000 and you owe $150,000 on your mortgage, you have approximately $350,000 in equity.
Over time, many homeowners build substantial equity through mortgage payments and appreciation in property value. A reverse mortgage allows qualified homeowners to access a portion of that equity without selling the home.
With a traditional mortgage, you borrow money to purchase a home and make monthly payments to repay the loan over time.
A reverse mortgage works differently.
Instead of you making payments to a lender, the lender makes funds available to you, drawing on the equity you have already built in your home. Those funds can be received as a lump sum, monthly payments, a line of credit, or a combination, and eligible borrowers generally are not required to make monthly mortgage payments while they continue to live in the home and meet the loan requirements.
Interest and applicable fees are added to the loan balance over time, and the loan is typically repaid later, usually from the sale of the home, when the borrower sells, permanently moves out, or passes away.
That does not mean homeowners have no responsibilities. Borrowers are still expected to:
- Live in the home as their primary residence
- Keep the property in good condition
- Stay current on property taxes
- Maintain homeowners insurance
- Pay any applicable homeowners association dues
Failing to meet these obligations could place the loan in default, so it's important to understand them before moving forward.
While every situation is unique, reverse mortgages are generally available to homeowners who:
- Are age 55 or older
- Live in the home as their primary residence
- Have sufficient home equity
- Are able to meet the ongoing property obligations associated with the loan
- Complete the required counseling process for eligible government-insured programs
Additional lending requirements may apply based on the specific loan program and your financial circumstances.
This is one of the most common questions we hear.
Yes.
With a reverse mortgage, you continue to own your home. Your name remains on the title, and you retain ownership just as you would with many other types of mortgage financing.
Like any mortgage, the lender places a lien against the property until the loan is repaid, but ownership remains with the homeowner.
A reverse mortgage generally becomes due when the last eligible borrower:
- Sells the home
- Permanently moves out of the home
- Passes away
At that point, the loan is typically repaid through the sale of the property or other available funds.
If heirs wish to keep the home, they may have options to satisfy the loan balance, depending on the circumstances and applicable loan guidelines.
Because every estate is different, it's often helpful to discuss these considerations with both your lender and your family's legal or financial advisors.
For many government-insured reverse mortgage programs, borrowers are required to complete an independent counseling session before the loan can move forward.
This counseling is conducted by an agency approved by the U.S. Department of Housing and Urban Development (HUD) and is designed to help homeowners understand:
- How reverse mortgages work
- The costs involved
- Your ongoing responsibilities
- Possible alternatives
- Questions you should consider before borrowing
The counselor is not employed by the lender, and the session is intended to ensure you have the information needed to make an informed decision.
Many homeowners find the counseling process reassuring because it provides an additional opportunity to ask questions from an independent source.
How Can the Money Be Received?
One of the advantages of a reverse mortgage is that there are several ways loan proceeds may be made available, depending on the program and your financial goals.
Lump Sum
Some borrowers choose to receive a single payment at closing. This option is often used to pay off an existing mortgage or address another significant financial need.
Monthly Payments
Funds may be distributed in regular monthly installments, providing additional income throughout retirement.
Line of Credit
Some homeowners prefer a line of credit that allows them to access available funds as needed rather than receiving everything at once.
Combination Options
Depending on the loan program, it may be possible to combine payment methods to better fit your individual needs.
We'll help you understand the available options and discuss which approach may be appropriate for your situation.
Are There Different Types of Reverse Mortgages?
While there are several types of reverse mortgage products available, they generally fall into two broad categories.
Home Equity Conversion Mortgages (HECMs)
HECMs are government-insured reverse mortgages backed by the Federal Housing Administration (FHA). They are the most common type of reverse mortgage and include consumer protections, eligibility requirements, and mandatory counseling.
Proprietary Reverse Mortgages
Some private lenders offer proprietary reverse mortgage products that are not insured by the FHA. These loans may be appropriate for certain homeowners, particularly those with higher-value properties or situations that fall outside traditional HECM guidelines.
We'll help you understand which programs may be available based on your circumstances.
Is a Reverse Mortgage the Right Choice?
A reverse mortgage can be a valuable financial planning tool for some homeowners, but it is not the right solution for everyone.
That's why we encourage every client to look at the complete picture.
Your retirement goals, income, home equity, family plans, and long-term housing needs all deserve careful consideration before making a decision.
We'll take the time to review your situation, answer your questions, and help you understand both the advantages and the tradeoffs so you can make a choice with confidence.
Continue Exploring Your Options
Learning about reverse mortgages is only the beginning.
You may also find these resources helpful:
No obligation, no pressure
Have Questions?
Every homeowner's situation is different, and there's no substitute for a conversation about your specific goals.
If you'd like to discuss your options or simply have questions about how reverse mortgages work, we're happy to help. Our consultations are educational, informative, and focused on helping you make the decision that's right for you.