Reverse Mortgages Explained: How They Work, Costs, and Key Considerations

For homeowners aged 62 and older, a reverse mortgage is a loan that allows you to convert a portion of your home's equity into cash without requiring monthly mortgage payments. The loan is repaid when the last borrower permanently moves out or passes away. While it can be a tool to supplement retirement income, it's crucial to understand that borrowers remain responsible for property taxes, homeowners insurance, and home maintenance.

What is a Reverse Mortgage?

A reverse mortgage is a specialized financial product for seniors. Unlike a traditional forward mortgage where you make monthly payments to the lender, a reverse mortgage pays you. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). It's essential to know that you retain title to your home, but the loan balance increases over time as interest and fees are added.

Who Offers Reverse Mortgage Loans?

Reverse mortgages are primarily available through FHA-approved lenders offering HECM loans. These government-insured loans have specific limits and consumer protections. Some banks and credit unions also offer proprietary, non-HECM reverse mortgages, which may provide higher loan amounts for high-value homes but often come with higher costs and lack federal insurance.

How Does a Reverse Mortgage Work?

The amount you can borrow depends on the youngest borrower’s age, the home’s appraised value, and current interest rates. Generally, older borrowers and more valuable homes qualify for larger amounts. You can receive the funds in several ways:

• Line of Credit: Draw funds as needed, with the unused balance potentially growing.
• Tenure: Fixed monthly payments for as long as you live in the home.
• Term: Fixed monthly payments for a set period.
• Lump Sum: A single payment at closing (only available for fixed-rate loans).

Based on our experience assessment, a line of credit often provides the most flexibility for long-term financial planning. When the loan becomes due, you or your heirs repay the cash received plus interest and fees, typically by selling the home. Any remaining equity belongs to your estate.

What are the Costs of a Reverse Mortgage?

Costs can be significantly higher than a conventional mortgage. Key fees include:

Interest rates are typically adjustable, which means your loan balance can grow at a variable rate.

What are the Advantages and Disadvantages?

Advantages:

• Supplement Retirement Income: Provides tax-free funds without mandatory monthly mortgage payments.
• Stay in Your Home: You can remain in the home as long as it is your primary residence and you meet loan obligations.
• Non-Recourse Loan: The debt cannot be passed to your heirs; the lender's repayment is limited to the home's value.

Disadvantages:

• Accruing Debt: Your loan balance increases over time, reducing home equity.
• High Upfront Costs: Origination fees and insurance premiums can be substantial.
• Obligation to Maintain the Property: Failure to pay property taxes and insurance can lead to foreclosure.

Before proceeding, independent counseling from a HUD-approved agency is mandatory to ensure you understand the long-term implications. Compare quotes from multiple lenders and review the Total Annual Loan Cost (TALC) disclosure to make an informed decision.