Taking out a reverse mortgage can be a convenient way to access your home equity. Unlike a home equity loan or a home equity line of credit (HELOC), a reverse mortgage does not require any payments as long as you use the home as your principal residence. However, interest and fees can accrue on the balance that’s payable once you sell the home, move out, or die. There are also unscrupulous lenders out there looking to take advantage of borrowers, so it’s important to tread carefully.
- A reverse mortgage offers homeowners a way to access the equity in their homes and use it as an income stream without making payments to a lender.
- Reverse mortgages that are backed by the federal government are called home equity conversion mortgages (HECMs).
- Reverse mortgages can have higher interest rates than traditional mortgage loans or home equity loans.
- The rate that you pay for a reverse mortgage can vary by lender, and you may have the option to choose a fixed or variable interest rate.
Reverse Mortgage Explained
Reverse mortgages give homeowners a way to turn their home equity into a stream of supplemental income. A reverse mortgage company pays out equity to the homeowner in a lump sum, installments, or a line of credit. The homeowner pays nothing back toward the balance as long as they continue to use the home as their principal residence.
When the homeowner sells the property, moves out, or dies, the reverse mortgage balance is payable in full. This includes the principal amount of equity borrowed as well as interest and fees that have accrued. A reverse mortgage is similar to a home equity loan or a HELOC in that the homeowner is tapping equity. What is different is that they’re not making monthly payments to a lender.
Reverse mortgages can be offered by private lenders; federal, state, and local government programs; and nonprofit organizations. A home equity conversion mortgage (HECM) is the only reverse mortgage that’s backed by the federal government. Specifically, HECMs are administered through the U.S. Department of Housing and Urban Development (HUD).
To get an HECM, you must be age 62 or older, own your home outright or have paid off most of the mortgage, have sufficient financial resources, and not be delinquent on any federal debt.
Reverse Mortgage Interest Rates
Interest on a reverse mortgage accrues continuously, but payment of interest charges, fees, and the principal balance is deferred until a future date, which is when the homeowner is no longer living in the home. In the case of married couples, a spouse who is listed as a co-borrower or an eligible non-borrowing spouse has a right to remain in the home without paying anything toward the reverse mortgage balance if their spouse moves out or dies.
Reverse mortgages can have fixed or variable interest rates. Fixed rates remain the same for the duration that interest accrues. Variable rates have an underlying index and margin rate. When changes occur in the benchmark rate, the variable rate for a reverse mortgage can follow suit. This means that the rate can move up or down in tandem with the benchmark rate.
Choosing a fixed rate for an HECM can offer some predictability in terms of estimating how much interest will accrue on the balance, but there is a caveat: You’re typically required to take the funds as a lump sum. You could opt for installment payments with a variable-rate HECM, but in that case, it’s more difficult to calculate how much interest will accrue.
|Home Equity Conversion Mortgage (HECM) Rates as of April 14, 2022|
|Fixed Rate||Adjustable Rate||Loan Limit|
Source: All Reverse Mortgage
The rates that you pay for an HECM and the rates that you pay for a reverse mortgage from a non-HECM lender may be very different. For that reason, it’s important to compare the best reverse mortgage companies online to see which one offers the best rates and terms.
The amount that you can borrow with an HECM will depend on current interest rates.
Other Reverse Mortgage Charges
Interest is not the only cost to consider when getting a reverse mortgage. There are other fees and charges for which you may be responsible.
With an HECM, for example, you’re also required to pay:
As an HECM is insured by the Federal Housing Administration (FHA), borrowers are subject to MIPs. This includes an initial up-front MIP of 2% and an additional MIP of 0.5%, which applies for the life of the loan.
HECM lenders can charge the greater of $2,500 or 2% of the first $200,000 of your home’s value, plus 1% of the amount over $200,000 for the origination fees. HUD caps origination fees for HECMs at $6,000. This amount is deducted from the proceeds payable to you at closing.
Closing costs can include appraisal fees, title search fees, insurance, inspection fees, and credit check fees. HUD does not specify an upper limit on these costs. Finally, your HECM lender also may charge a monthly servicing fee of up to $35.
The larger your HECM and the longer that you keep the loan, the more that these charges can add up, so it’s important to balance how much of your equity you’d like to access against what the total charge may end up being. For example, if you have to move to a long-term care facility, the full amount would be due if no eligible person is living in the home. You or your children likely would have to find the money to pay it off or sell the home to clear the balance.
Depending on the lender, you may be able to negotiate down certain closing costs to save money.
Are reverse mortgage interest rates higher?
Reverse mortgage rates usually are higher than interest rates for other types of mortgage loans, such as purchase loans or home equity loans. You also need to factor in additional costs, including the 2% up-front mortgage insurance premium (MIP), the 0.5% ongoing MIP, origination fees, and closing costs.
How do interest rates affect reverse mortgages?
Interest rates can affect how much of your home equity you’re able to access through a home equity conversion mortgage (HECM). Higher interest rates can shrink the principal amount paid out to you when you take out a reverse mortgage.
What is the average rate on a reverse mortgage?
Reverse mortgage rates are not static, and the average rate can fluctuate over time. As of April 2022, HECM rates ranged from 4.81% to 5.18%. For larger reverse mortgages, called jumbo reverse mortgages, they ranged from 5.49% to 6.50%. Non-HECM rates on what are known as proprietary reverse mortgages could be higher, anywhere from 4.90% to the high 6% range as of March 2022.
The Bottom Line
Reverse mortgages can be a useful addition to your retirement income strategy, but it’s important to understand that this is not free money. Interest will accrue, and the higher the rate, the more that a reverse mortgage will cost in the long run. Considering the pros and cons of reverse mortgages, as well as other options such as home equity loans or HELOCs, can help you to decide if it’s right for you.
U.S. Department of Housing and Urban Development. “How the HECM Program Works.”
Consumer Financial Protection Bureau. “When Do I Have to Pay Back a Reverse Mortgage Loan?”
U.S. Department of Housing and Urban Development. “Home Equity Conversion Mortgage (HECM).”
All Reverse Mortgage. “Current Reverse Mortgage Rates: Today’s Rates, APR | ARLO™.”
Consumer Financial Protection Bureau. “How Much Will a Reverse Mortgage Loan Cost?”
All Reverse Mortgage. “2022 Proprietary Reverse Mortgages: Lenders Rates & Limits.”
Reverse Mortgage Guide With Types and Requirements
The Reverse Mortgage: A Retirement Tool
Reverse Mortgage: The Pros and Cons
Alternatives to a Reverse Mortgage
How to Avoid Outliving Your Reverse Mortgage
How to Get Out of a Reverse Mortgage
Reverse Mortgage Pitfalls
What Are the Different Types of Reverse Mortgages?
Home Equity Conversion Mortgage (HECM): Definition, Eligibility
Single-Purpose Reverse Mortgage
When to Get a Single-Purpose Reverse Mortgage
Jumbo Reverse Mortgage
Proprietary Reverse Mortgage
Who Needs a Proprietary Reverse Mortgage?
What You Need to Qualify for a Reverse Mortgage
Best Reverse Mortgage Companies
How to Find a Trustworthy Reverse Mortgage Counselor
Reverse Mortgage Financial Assessment
Reverse Mortgage Initial Principal Limit
Reverse Mortgage Net Principal Limit
How to Choose a Reverse Mortgage Payment Plan
Term Payment Plan
Tenure Payment Plan
Single-Disbursement Lump-Sum Payment Plan
Interest Rates for Reverse Mortgages
Reverse Mortgage Fees Explained
Can You Transfer a Reverse Mortgage?
Reverse Mortgage Problems for Heirs
Reverse Mortgage: Could Your Surviving Spouse Lose the House?
Non-Borrowing Spouse Protections and Reverse Mortgages