A reverse mortgage can allow you to continue living in your home while tapping some of your accumulated home equity. The mortgage generally doesn’t have to be paid off until you die or move out of the home for 12 months or more. While that can be a good arrangement for some people, it isn’t for everyone.
Here are some questions to ask yourself in deciding whether a reverse mortgage is right for you.
- A reverse mortgage can provide you with regular cash flow in retirement to supplement your other income, but there are some downsides worth considering.
- If you have a spouse, they may or may not be able to remain in the home, depending on whether or not they are a co-borrower.
- Other types of heirs will have to pay off the loan or buy the home with their own money.
Do I Qualify for a Reverse Mortgage?
The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and issued by FHA-approved lenders. HECMs are available only to borrowers ages 62 and older.
Among the other eligibility requirements are that you must not be delinquent on any federal debt and have sufficient financial resources to keep paying property taxes and insurance premiums on the home.
What About My Spouse?
Your spouse’s age also matters. If they aren’t 62 or older, they can’t be listed as a co-borrower on the mortgage. Being a co-borrower has its advantages, with the primary one being that a co-borrower can stay in the home if you die or move out for 12 consecutive months or more (such as into a nursing home). Equally important: They can also continue to receive proceeds from the reverse mortgage.
A co-borrower on a reverse mortgage doesn’t have to be a spouse, but they must be at least age 62 when the loan is issued.
If your spouse isn’t old enough to be a co-borrower, they still may be listed in the loan documents as an eligible non-borrowing spouse. That can allow them to stay in the home (if they meet certain other requirements), but they won’t be entitled to any additional payments from the loan.
If your spouse is neither a co-borrower nor an eligible non-borrowing spouse, they’re considered an ineligible non-borrowing spouse, and they will have to move out of the home unless they come up with money to buy it back from the lender.
(Note that the rules above apply to HECMs originated on or after Aug. 4, 2014, and can differ for older HECMs. The Consumer Financial Protection Bureau has both sets of rules on its website.)
Will My Home Qualify for a Reverse Mortgage?
To be eligible for a reverse mortgage, your home must be one of the following:
- A single-family home that you occupy as your principal residence, or a two- to four-unit home with one unit that you occupy
- A U.S. Department of Housing and Urban Development (HUD)-approved condominium project
- An individual condominium unit that meets FHA requirements
- A manufactured home that meets FHA requirements
In addition, your home must be either paid off or largely paid off, giving you a substantial amount of equity in the home against which to borrow.
Do I Really Need the Money from a Reverse Mortgage?
A reverse mortgage might make sense for you if your retirement expenses exceed your income from Social Security and other sources and if you don’t have much retirement savings from which to draw. Depending on whether it is a fixed- or variable-rate loan, an HECM can provide you with cash in several different ways.
With a fixed-rate HECM, your only option is to take the money as a single lump sum. That might be useful if you face a large expense (such as medical bills) or want to use the money to pay off an existing mortgage.
Adjustable-rate HECMs come in other forms:
- Tenure—You’ll receive equal monthly payments for as long as at least one borrower continues to occupy the property as their principal residence.
- Term—Here, you’ll also receive equal monthly payments, but only for a fixed number of months.
- Line of credit—Instead of receiving regular payments, you can take out money as needed until the line of credit is exhausted.
There are also two hybrid types:
- Modified tenure—This provides regular monthly payments as described above plus access to a line of credit.
- Modified term—This has term payments as described above along with access to a line of credit.
Regular monthly payments from a tenure or term reverse mortgage could assure that you will have enough income to meet your everyday expenses, while a line of credit could be useful if you’re hit with big, unexpected bills. However, bear in mind that a reverse mortgage is expensive in terms of FHA insurance and closing costs, and that it will gradually deplete the equity in your home over a period of time. Another option to consider would be downsizing, so that your expenses are more in line with your available income. You might find that you don’t need a reverse mortgage at all.
Do I Want to Leave an Inheritance?
Your home may be your most valuable asset and represent the bulk of your estate. If you are hoping to someday leave money to children, grandchildren, or other heirs, a reverse mortgage will cut into the wealth that you’re able to pass along. If you die, your heirs will inherit not only your home but also the responsibility for dealing with the mortgage. If you move out of your home—to assisted living, for example—you will have to handle these issues and will have less wealth left.
As described earlier, co-borrowers and certain non-borrowing spouses may be able to remain in the home. Other types of heirs are left with three alternatives:
- Sell the home to pay off the mortgage—Whatever equity (if any) is left becomes part of their inheritance.
- Pay off the mortgage with their own money and keep the home—Unless they have the spare cash, this probably means taking out a mortgage of their own.
- Sign the home over to the lender to settle the debt—This is known as a deed in lieu of foreclosure.
One good thing about HECMs is that no matter how much you borrowed, your heirs won’t owe more money on the mortgage than the home is worth. The most that they’re obligated to pay is either the full loan balance or 95% of the home’s appraised value, whichever is less. FHA insurance covers any difference.
Your heirs can be required to take action fairly quickly—technically, within 30 days of receiving a Due and Payable Notice from the lender, although they can request an extension of up to a year to sell the home or obtain financing to buy it themselves.
In the worst-case scenario, a reverse mortgage can leave your heirs with little money and a big hassle. If they are already well-off or if you don’t have heirs, this may not be an issue. Otherwise, it’s worth thinking about whether you really need a reverse mortgage. You may decide that you do. It is your equity, after all, and your heirs probably would rather see you live in reasonable comfort than deprive yourself needlessly.
Are reverse mortgages expensive?
Yes, they are. The Federal Housing Administration (FHA) insurance that you must purchase to protect the lender on a home equity conversion mortgage (HECM) costs 2% of the loan amount at the outset, plus 0.5% of the loan balance every year after that, with that balance growing year after year. In addition, there are other closing costs, including an origination fee of $2,500 to $6,000 that goes to your lender and ongoing monthly fees of $30 or $35 charged by your loan servicer.
When is the best age to get a reverse mortgage?
While you can get a reverse mortgage as early as age 62, you’ll generally qualify for a higher borrowing limit if you’re older. In addition, taking out a reverse mortgage later in life gives you time to build up more home equity and reduces the risk that you will use up all of your equity before you need it most.
Can you get a reverse mortgage on a second or vacation home?
No, you can’t. To qualify for a reverse mortgage, the home must be your principal residence.
The Bottom Line
Reverse mortgages are complicated and expensive, and they are prone to exploitation by unscrupulous people. Before you enter into one, you’ll want to consider the implications for your spouse or other heirs and weigh the alternatives.
One of the requirements for getting an HECM (the most common type of reverse mortgage) is that you meet with a counselor approved by HUD. They can also help you decide whether a reverse mortgage makes sense in your situation.