In a reverse mortgage, also known as a conversion mortgage, the home is used a collateral to get cash. This is similar to a standard mortgage, but with a reverse mortgage the homeowner doesn't need an income to qualify and there are no monthly loan payments.
With a reverse mortgage, the loan and the interest on the loan are paid off when the property is sold.
How Do Reverse Mortgages Work?
Once the property is sold—and this can be during the homeowner’s lifetime or after his or her death—the sale price of the property pays back the loan. This rule is in place even if the sale price is less than the combination of the loan and interest.
Lenders must accept only the sale price and cannot—by law—go after the homeowner’s other assets.
What are the Advantages of a Reverse Mortgage?
- Homeowners can pull needed cash from the equity of the home, without incurring monthly expenses.
- Lenders cannot force homeowners to sell the property to pay back the loan.
- Reverse mortgages guarantee that the homeowner can stay on the property for as long as he or she lives, even if the outstanding loan and interest grow to exceed the value property’s value.
What are the Disadvantages of a Reverse Mortgage?
- Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. A reverse mortgage can cost thousands more than a conventional mortgage. One lower cost option is the FHA reverse mortgage program from the U.S. Department of Housing & Urban Development (HUD).
- It’s important to calculate the cost of a reverse mortgage against what you would gain, because once you enter a reverse mortgage agreement, the mortgage company essentially owns your home.
- Get sound advice. Discuss your reverse mortgage plans with legal and financial advisors, and family members, before making a decision. Because home ownership is often a person's most valuable asset, getting a reverse mortgage is essentially the same as spending the money you'd expect to leave to your heirs.
- Be sure that the older homeowner is thinking clearly when making this decsion (no dementia or symptoms of Alzheimer's), because having a sudden influx of cash can be a heady experience and it would be a shame to waste it or become the victim of a scam.
- Reverse mortgages are often seen as a last resort if the homeowner needs cash and there are no other options.
What are the Rules of Reverse Mortgages?
- To reduce their risk, lenders generally limit reverse mortgage loans to amounts that are below their estimate of the property’s full value.
- Age is an advantage when applying for a reverse mortgage. Borrowers must be at least age 62, and the older the homeowner is, the more money he or she would qualify for. For example, a 78-year-old borrower would qualify for a larger loan than a 62-year-old.
What are the Limits on Reverse Mortgages?
- Limits can vary across the country. The most popular option, the Home Equity Conversion Mortgage, which accounts for nine of every 10 reverse mortgages in the U.S., limits loans to $312,896.
- The Fannie Mae Home Keeper loan, number two in popularity, limits loan amounts to $359,650.
If you are considering a reverse mortgage, it’s important to get as much information as you can, and to consider all of your options.
For many older homeowners, selling your home and moving to a less expensive home is the best way to protect your assets for yourself and your family.
If you want to explore reverse mortgages, there’s a wealth of information from AARP on different options and how to qualify.
