Known as the loan where a lender makes payments to you, reverse mortgages are on the rise. So, too, is home equity. In 2021, accelerating housing prices in the United States caused homeowners to gain more than $3.2 trillion in home equity, according to an analysis from financial firm CoreLogic. The situation means that reverse mortgages will continue to be attractive to homeowners in need of liquidity.
While they have become more popular, reverse mortgages certainly aren’t right for everyone. To decide if one is right for you, you need to know how they work and what their requirements are. It’s also worth noting that those who don’t have enough equity to make a reverse mortgage worthwhile, or who would simply prefer an alternative, have other options.
- Reverse mortgages are meant to let older people access funds by putting up home equity as collateral to secure extra cash.
- To qualify for a home equity conversion mortgage (HECM), a reverse mortgage that is backed by the federal government, the U.S. Department of Housing and Urban Development (HUD) says that you must be age 62 or older and either own the home outright or have paid down a “considerable amount” of your traditional mortgage.
- If you don’t have enough equity to make a reverse mortgage worthwhile, there are other options, including refinancing, downsizing, and getting assistance to lower your expenses through available government programs.
What Is a Reverse Mortgage?
A reverse mortgage allows you to take out a loan by using the equity in your home as collateral. Instead of the borrower making loan payments, the entirety of the loan will not come due until the borrower dies, moves out for more than 12 consecutive months, or sells the house. Reverse mortgages are meant to let older people access funds, providing extra cash that can be put toward healthcare expenses and other needs.
The limits for a home equity conversion mortgage (HECM)—a reverse mortgage that is backed by the federal government—have been increasing. However, the most that the U.S. Department of Housing and Urban Development (HUD) will let anyone take out in 2022 is $970,800.
What Are Reverse Mortgage Requirements?
Among the requirements for an HECM, the most common reverse mortgage, are that you be age 62 or older, that the home is your principal residence, and that you have no federal debt. Those who go through with a reverse mortgage will also have to undergo counseling with an agency approved by HUD.
A 20th Century Invention
The reverse mortgage was reportedly invented in 1961, written by Nelson Haynes of Deering Savings & Loan to allow Nellie Young, a widow in Portland, Maine, to stay in her family home. The financial tool has increasingly become subject to regulatory oversight even as it has become more popular.
How Much Home Equity Do You Need?
Perhaps the most important eligibility requirement for an HECM is how much home equity you have. Unfortunately, the exact amount that you need to get an HECM is unclear. HUD simply says that you must own the property outright or have “paid down a considerable amount.” Most financial advice says that you should own at least 50% to 55% of the equity in your home to qualify for an HECM. You also must have sufficient financial reserves to meet ongoing expenses, such as property taxes, insurance, and maintenance.
Because the loan is secured with home equity, the amount of that equity will affect how much money you can get. If you don’t own your home outright, the funds will be used first to pay off your remaining mortgage. You will then get what’s left over as a lump sum, in regular monthly installments, as a line of credit, or as a combination of the latter two.
What If You Don’t Have Enough Equity?
Reverse mortgages represent one way to get the equity out of your home, but they aren’t the only way. If you don’t qualify for a reverse mortgage but still want to turn your equity to cash, there are options that you can consider.
The Consumer Financial Protection Bureau recommends several alternatives to reverse mortgages, beginning with home equity loans and home equity lines of credit (HELOCs). Like reverse mortgages, home equity loans and HELOCs will let you take out money secured against your home equity. Unlike reverse mortgages, though, these have monthly payments. Ultimately, they may be cheaper, but they still rely heavily on equity.
What if you don’t have much equity in the first place? Well, in that case, you might:
- Refinance—It’s not always advisable to refinance your mortgage, so making this decision requires careful thought. Still, a refinance can potentially reduce your interest rate, consolidate debt, and/or tap equity.
- Get government assistance—If the problem is expenses that pile up, there are government programs offering assistance in making some of those payments. You can find them through your county or town tax office or through the U.S. Department of Health and Human Services’ Administration for Community Living, a federal support agency for aging and disabled populations.
- Downsize—If you need cash badly, it may make sense to sell your home and relocate to a smaller, less expensive one.
Can you sell a home that has a reverse mortgage?
Yes, but doing so will make the reverse mortgage come due. Also, if the last co-borrower dies or moves out of the home for more than 12 consecutive months, full and immediate payment of the loan will be triggered, an occurrence called a maturity event.
Can you leave a home that has a reverse mortgage to your heirs?
Yes, but they’ll have to pay off the reverse mortgage to avoid foreclosure. The fact is that most reverse mortgages end up being paid by selling the home, which means that your heirs will not get to inherit it.
Do you still own your home if you have a reverse mortgage?
Yes, because your name remains on the title; as with a traditional mortgage, you’re using the home as collateral for the loan. Remember, though, that as a reverse mortgage ages, your debt goes up while your home equity goes down.
The Bottom Line
A reverse mortgage is a financial tool that allows you to turn your home equity into cash, but it’s not the only way to do that. Before deciding to take one out, you should carefully weigh the pros and cons.