Reverse Mortgage Care


Reverse Mortgage Frequently Asked Questions

What is a reverse mortgage?
A reverse mortgage allows individuals over the age of 62 to tap into the equity in their homes.  Reverse mortgages primarily work in the opposite way – or reverse – of how a regular mortgage works.  In a traditional mortgage, a lender provides the homeowner with a lump sum payment up front to meet the costs of buying a home and the homeowner then repays the lender monthly or on another agreed upon schedule while living in the home.  In a reverse mortgage, on the other hand, the lender provides the homeowner with a lump sum or monthly payment, or allows them to tap into the equity in their home at their discretion (similar to a home equity loan), but the homeowner does not repay any portion of the loan until they cease to occupy the home. Homeowners retain full possession of their homes when they obtain a reverse mortgage.   Once the home is sold, the homeowner or the homeowner’s estate if they are deceased, pay off the full amount owed on the reverse mortgage and then keep any additional money obtained through the sale of the home.

What is an HECM?
An HECM, also known as a Home Equity Conversion Mortgage, is a reverse mortgage loan option insured by the federal government offering senior citizens an opportunity to tap into the equity in their homes to increase their income or assets or to pay off necessary expenses.  The loans are insured by HUD (the U.S. Dept of Housing and Urban Development).

Are there different types of reverse mortgages?
You can choose the type of payment option you desire – lump sum payment, monthly payments based on a fixed amount of time (“term”) or based on your life expectancy or the amount of time you expect to live in the home (“tenure”), or a line of credit in which you request money as desired.  Some reverse mortgages have monthly fees while others do not, and most will have closing fees but the amounts can vary by lender.  Some reverse mortgages are backed by the FHA (HECMs) and others are offered by private lenders.  If you are looking to borrow money for a specific purpose, such as a home remodel or medical expense, you may be eligible for a single-purpose reverse mortgage, which carries lower fees than other types of reverse mortgages.

Who is eligible to get a reverse mortgage?
Any individual over the age of 62 that owns any type of residential property that is the borrower’s primary residence, with the exception of cooperative housing, is eligible to get a reverse mortgage, as long as they have enough equity in their home.  The credit, income and expenses of the borrower are also evaluated during the reverse mortgage process. Second homes, vacation homes and rental income properties are not eligible

Who owns my house if I get a reverse mortgage?
You retain ownership of your house if you have a reverse mortgage and remain responsible for paying real estate taxes, homeowners’ insurance and keeping the property maintained, but at the time you cease to permanently occupy your home, the reverse mortgage must be paid off in full (within about six months).  Typically this requires that you sell the home and that any proceeds from the sale of the house must first be paid to the reverse mortgage lender, up to the total amount of the loan due. Any additional money received in the sale of the home is the property of the homeowner or the homeowner’s estate.

How much money can I receive from a reverse mortgage and how do I receive the money?
The amount of money you can receive through a reverse mortgage will depend on a number of factors.  These include the market value of your home, your age as well as your spouse’s age (the lower of the two is considered), current interest rates, your income, expenses and credit and whether there is a particular lending limit where you live.  The older you are, the more valuable your home is, and the lower the interest rates, the more you will be eligible to borrow.  Payment options vary and may include a lump sum payment, a line of credit, or fixed scheduled payments that are either set up for as long as you live in your home or for a specific amount of time.  Payment options can be combined and can also be changed during the course of the loan, usually for a small fee.

Are there restrictions as to how I can use the money I get from a reverse mortgage?
No.  Reverse mortgages provide a way for individuals to tap into the existing equity in their homes so that they can receive more income to use as they see fit.  Proceeds from a reverse mortgage can be used at the homeowner’s discretion and can provide additional income to cover anything from living or medical expenses to a vacation, home remodel, new car, or to cover any desired expenses.

What is the difference between a reverse mortgage and a home equity loan?
A reverse mortgage allows you to borrow against the equity in your home without requiring you to repay any portion of that loan while you are still living in the home.  Although a home equity loan also allows you to borrow against the equity in your home, it does require you to pay back the loan according to an agreed upon schedule while you still reside in your home.   Costs and fees on reverse mortgages are typically higher than home equity loans, however.

Can I get a reverse mortgage if I already have an existing mortgage or loan against my home?
You can, but since the reverse mortgage must be the first lien against your home, you first need to pay off any existing mortgages or loans.  You can do that by using a portion of the proceeds of your reverse mortgage to pay off your existing mortgage, or you can pay off the mortgage using other assets.  However it is done, the existing mortgage must be paid off in full once you obtain a reverse mortgage.

How does the interest work on a reverse mortgage?
The interest charged on a reverse mortgage accumulates only on the portion of the equity that is distributed to the homeowner.  So, for example, if a homeowner chooses to set up their reverse mortgage similar to a line of credit, they are only charged interest on the proceeds that are distributed.  Most reverse mortgages use a variable interest rate, although there are some that use a fixed rate.  Variable rates are tied to a specific financial index plus an additional margin.  Interest compounds over the life of the reverse mortgage and is not due until the loan is repaid.

Are there any other fees on a reverse mortgage?
There are closing fees on a reverse mortgage, as with any other type of mortgage, and they can be higher than traditional loans.  Some reverse mortgages also have monthly servicing fees (but not all) and these usually range in the neighborhood of $30 – $35 per month.  The monthly service fees can be set against your reverse mortgage loan amount, based on a calculation that takes into account your calculated life expectancy, and this is called a Service Fee Set Aside, or SFSA.  You do not need to pay these fees on a monthly basis, however – they will be factored into the debt repayment when you cease to occupy your home.

What are the tax implications of a reverse mortgage?
The income you receive from a reverse mortgage is not taxable.  Interest due on the loan is not tax deductible until the loan is paid off.

How is a reverse mortgage paid back?
A reverse mortgage is paid back when you no longer utilize your home as your primary residence.  This may happen if you permanently move out of the home, sell the home or die.  Once you no longer occupy your home, the total due on the reverse mortgage is due in full, although the amount due cannot exceed the market value of your home at that time if it is sold.  So, if your home sells for less than you owe on the reverse mortgage, the lender can only collect the total amount that the house sold for and any difference is made up to the lender by FHA.  No other assets within the estate need to be used to pay off the amount of the reverse mortgage.  If the house sells for more than the reverse mortgage amount, the lender receives the total due on the reverse mortgage and the remaining money is retained by you (or your estate).  If you or your heirs wish to retain ownership of the home, the reverse mortgage must be paid back in full, regardless of the market value of the home.

What happens to my reverse mortgage once I die?
Unless there is a surviving spouse still living in your home, a reverse mortgage must be paid off within about six months after you die. The estate has the option of selling the home to pay off the reverse mortgage and any additional money from the sale above the balance of the reverse mortgage will go to the estate.  The estate may also keep the home by refinancing it or using other assets to pay off the reverse mortgage in order to retain ownership of the home.

Is counseling required to get a reverse mortgage?
Yes.  By law, individuals seeking a reverse mortgage must first receive counseling from an independent third party such as a national counseling agency or a local HUD-approved counseling agency.  The counseling can take place by phone or in person and the counselor must ensure that you have reviewed other options, understand the financial implications of a reverse mortgage including all costs and fees, and that you comprehend the implications to your estate and any tax issues that may result when obtaining a reverse mortgage.

How can I determine if a reverse mortgage is right for me?
There are numerous factors that should be considered before deciding if a reverse mortgage is right for you.  Considerations should include your age, how much your home is worth, what you need the money for, whether obtaining a reverse mortgage will affect any government assistance you receive (it may affect Medicaid eligibility if you do not use any proceeds within the same month you receive them for a specific purpose), what interest rates are, the costs and fees of a reverse mortgage, and so on.

Please view our reverse mortgage pros and cons page to learn about the advantages and disadvantages of a reverse mortgage.

This material is not from HUD or FHA and has not been approved by HUD or a government agency.

Reverse Mortgage Care