What Is a Reverse Mortgage?
This article is intended for general informational purposes only and does not constitute financial, tax, or legal advice. Homeowners considering a reverse mortgage should consult with qualified professionals to determine whether it is appropriate for their individual circumstances.
With encouragement from celebrity spokespersons such as Fred Thompson, Robert Wagner, and Henry Winkler, awareness of reverse mortgages increased significantly over the past decade. As the population continues to age, the topic remains relevant, with more than 25 million homeowners meeting the minimum age requirement.
A reverse mortgage allows homeowners age 62 or older who live in their home as a primary residence to access a portion of their home equity. The amount available is based on the borrower’s age, the home’s current value, and prevailing interest rates. Loan proceeds may be received as a single lump sum, a line of credit, or as periodic payments. Closing costs can be paid in cash or rolled into the loan amount.
There are no required monthly mortgage payments with a reverse mortgage. However, the homeowner remains responsible for property taxes, insurance, maintenance, and other ongoing home-related expenses. As with other housing-related decisions later in life, homeowners often weigh options such as staying put, downsizing, or restructuring how they use their home equity.
How the Loan Is Repaid
When the borrower dies, permanently moves out of the home, or fails to meet the terms of the loan, the lender is repaid from the sale of the property. The borrower or their estate is not responsible for more than the value of the home at the time of sale. If the sale proceeds exceed the amount owed, the remaining equity belongs to the homeowner or their heirs.
Unlike traditional mortgages, a borrower’s income and credit score are generally not used to determine eligibility. The borrower must own the home free and clear or have substantial equity. It must be occupied as the borrower’s principal residence.
Reverse mortgages can be used to supplement income or fund major expenses, but they are not appropriate for every homeowner. HUD, the largest insurer of reverse mortgages, has expressed concerns about misleading or incomplete program descriptions. HUD-insured reverse mortgages, formally known as HECMs (Home Equity Conversion Mortgages), require borrowers to complete an independent counseling session with a HUD-approved counselor to ensure they understand the costs, obligations, and alternatives before proceeding.
A reverse mortgage, like any financial decision involving a home, requires careful consideration, due diligence, and professional guidance.
For additional information, see:
- The National Association of REALTORS®: Is a Reverse Mortgage Smart?
- the Federal Trade Commission: Reverse Mortgages
- The Consumer Financial Protection Bureau: What is a reverse mortgage?