What Is a Reverse Mortgage?

Did you recently retire or plan to retire soon? If your income takes a hit, you may consider a reverse mortgage to access cash and fill the void. But if you aren’t familiar with these loans and how they work, they’re a popular option for seniors looking to pull equity from their homes without taking on extra debt. Plus, you won’t have to worry about pesky mortgage payments, which can help free up funds to live life on your own terms during your golden years.

Reverse Mortgages Overview

Although they’re a type of home loan, reverse mortgages work a little differently. When you applied for a traditional mortgage, you borrowed the amount you needed to purchase your home and agreed to make monthly principal and interest payments over a 10, 15, 20 or 30-year period. If you got a fixed-interest loan, the principal and interest payments were set in stone. But if the rate was variable on the loan, you were informed that the payment amount could fluctuate over time, depending on market conditions.

With a reverse mortgage, though, you won’t make monthly mortgage payments. Instead, the lender will make payments to you from your home equity, depending on the method of disbursement you select. Some borrowers opt to be paid monthly for a set period or as long as they live. Others receive a lump sum payment or access to a line of credit that grows as they age.

How Do Reverse Mortgages Work?

You can expect to undergo the same steps as you did when you took out the original mortgage. If you meet the lender’s requirements, which will be discussed shortly, you can submit a formal application and upload any documents the lender needs to make a decision.

The lender will check your credit, take a look at your submissions and have the property appraised to confirm its value and ensure you have enough equity to qualify. A search will also be performed to make sure the property has a clear title and that there are no liens against it.

Upon approval of your application for a reverse mortgage, the lender will pay off your current home loan. Any equity that remains in the property following the sale will be paid out to you based on your preference. There are no spending restrictions, so you can use the funds however you like.

Once you pass away, the home will be sold by the lender to satisfy the outstanding balance. Be mindful that even if the property sells for an amount that’s lower than what you owe, the lender cannot go after your heirs to collect the difference. However, if the property sells at a premium or for more than what’s owed on the reverse mortgage, the difference goes to your estate.

But if you plan to pass the home down to your children or other descendants once you pass away, things could get a bit more complicated. Your heirs will have to pay off the reverse mortgage balance, either with cash or through a new home loan in their name, to keep the home. Or if the balance exceeds the fair market value, the lender must receive 95 percent of this amount for the heirs to take possession of the home.

How Do They Differ from Other Mortgages?

As mentioned above, reverse mortgages and traditional mortgages are complete opposites in terms of how they operate. With a traditional mortgage, you make monthly principal and interest payments until the balance is paid off. But with a reverse mortgage, the lender pays off your current mortgage if you have one and makes payments to you per the disbursement schedule you select.

You should also know that interest accrues on reverse mortgages over time. In turn, the equity you have in your home will decrease as the interest is added to the outstanding balance.

Types of Reverse Mortgages

Below is a description of the three types of reverse mortgages to choose from:

• Home Equity Conversion Mortgage (HECM): They are backed by the federal government and are the most commonly used amongst seniors. You’ll have flexibility with regard to funding disbursement but expect rather steep loan costs.
• Single-Purpose Reverse Mortgage: This type of reverse mortgage comes with lower borrowing costs but is only available through state governments, local governments and nonprofit organizations. Consequently, you may not find one in your area as the availability is limited. Furthermore, you should know that single-purpose reverse mortgages are only designed to cover home improvements or certain other expenses.
• Proprietary Reverse Mortgage: Private lenders offer proprietary reverse mortgages with streamlined application processes and quick funding times. Be mindful that this type of reverse mortgage is often pushed by scam artists looking to prey on innocent seniors.

Who is a Reverse Mortgage For?

A reverse mortgage is designed for homeowners who are at least 62 years of age and have a substantial amount of equity in their homes—more on if it’s a good fit for your financial situation shortly.

What is Needed for a Reverse Mortgage?

To be eligible for a reverse mortgage, you’ll need to meet the following requirements:

Age Requirement

Reverse mortgages are only available to borrowers who are at least 62 years old. Non-borrowing spouses that haven’t yet turned 62 can also be listed on the loan but aren’t eligible to receive the proceeds. The primary benefit here is to ensure they can remain in the home without having to make monthly mortgage payments if you’re the first to pass away.

Equity in Home

You should have 50 percent or more in home equity before applying for a reverse mortgage. So, if your home is valued at $225,000 and your outstanding mortgage balance is $44,500, you have $180,500($225,000 – $44,500) or 80 percent in equity, which is more than enough to qualify.

Fees and Costs

You need to pay property taxes, homeowners insurance premiums, HOA fees and CDD fees (if applicable) after taking out a reverse mortgage. It’s also your financial responsibility to maintain the property and have the necessary repairs completed to keep it in good shape.

Property Types

Both single-family homes and multi-family homes qualify for reverse mortgages. However, for the latter, you must live in one of the units since reverse mortgages can only be used on properties that serve as primary residences.

Manufactured homes and condominiums that are HUD-approved are also eligible for reverse mortgages.

Counseling

Borrowers are also required to undergo HUD-approved reverse mortgage counseling if they’re looking to take out a HECM.

No Delinquencies on Federal Debt

If you have a delinquent balance on file with a federal agency, you must reach out to have it resolved before you can be approved for a reverse mortgage.

Pros of Reverse Mortgages

Here are some benefits of taking out a reverse mortgage:

• You can supplement your retirement income. Instead of taking out personal loans, home equity loans that involve monthly payments or relying on credit cards, you can use a reverse mortgage to supplement your retirement income.
• You won’t have to deplete your cash reserves. If you opt to receive payments until your death, you can avoid the added stress of running out of retirement income or, even worse, having to empty out your cash stash to survive.
• You can remain in your home. Many homeowners sell their homes if they want to tap into equity without taking out a home equity loan or home equity line of credit (HELOC). But with a reverse mortgage, you can convert your home equity into cash without adding more debt payments to your budget. Plus, you can remain in your home as long as you adhere to the terms and conditions of the loan agreement.
• You can spend the funds however you see fit. Many personal loans come with usage restrictions. That’s not the case with reverse mortgages, though, and you’re free to spend the funds you receive to help you accomplish financial goals, supplement your income or for any other purpose.
• You don’t pay taxes on the funds you receive. Reverse mortgage payments are exempt from state and federal income taxation.

Cons of Reverse Mortgages

As with any home loan product, there are also drawbacks to consider:

• Reverse mortgages come at a cost. Borrowing costs can sometimes be on the steep end for these loan products. Expect to pay origination fees, service fees, FHA insurance and closing costs, just to name a few.
• You’ll have to pay mortgage insurance. If you take out a HECM, you’ll pay mortgage insurance premiums of 0.5 percent annually. There’s also an upfront cost of 2 percent of the total amount you borrow.
• You could lose your home. Failure to maintain the home, make necessary repairs or pay property taxes, homeowners insurance or HOA and CDD fees (if applicable) could subject you to foreclosure.
• You must use the home as your primary residence. Otherwise, you also risk the lender foreclosing on the home.
• Reverse mortgages sometimes affect other benefits. If you receive government benefits, like Medicaid and Supplemental Security Income (SSI), the proceeds you receive from your reverse mortgage could be counted as income. And in some instances, the financial help you receive from these need-based programs could be negatively impacted.
• Your heirs may have challenges keeping the home. As mentioned earlier, heirs are responsible for paying the balance of the reverse mortgage in full – or 95 percent of the market value if the balance is greater than the home is worth – to take possession from the lender. And if they let the home go, your heirs will only receive a payout if the home sells for more than what’s owed.
• There are tons of reverse mortgage scams. It’s not uncommon for scammers to peddle fraudulent reverse mortgage products to seduce seniors in desperate need of financial relief. So, it’s vital that you do your homework and steer clear of offers that seem far too enticing.

Is a Reverse Mortgage Right for You?

It depends on your unique financial situation. However, a reverse mortgage could be a smart financial move if:

• You’ve already reached retirement age, and your income is lower than expected, or you have more expenses than you thought you would.
• You don’t have a mortgage on your home because it’s paid in full or the property was purchased using cash.
• You have a substantial amount of equity in your home.
• You have no intention of passing your home down to your heirs to keep it in the family.
• You have very little or no money saved.

But if you meet any of the criteria below, you should probably avoid reverse mortgage and consider other options:

• You have a significant cash stash.
• Your life insurance policies have high cash values you can tap into.
• Your home has a lot of equity, and you don’t have a need to increase your retirement income.
• You want to pass the property down to your heirs.
• You can’t afford the upkeep on the property.
• Your homeowners’ insurance premiums and property tax bills are too much to handle.
• You plan to move to another home soon or anticipate being placed in an assisted living facility due to a medical condition.

Where to Get a Reverse Mortgage

A quick online search for reverse mortgage lenders will produce tons of results. But remember, not all lenders can be trusted, and some options you see can be scam artists disguised as mortgage companies available to help you pull cash out of your home and set you free from monthly mortgage payments.

A quick online search for reverse mortgage lenders will produce tons of results. But remember, not all lenders can be trusted, and some options you see can be scam artists disguised as mortgage companies available to help you pull cash out of your home and set you free from monthly mortgage payments.

A better idea: Look at what Top Flite Financial, a leading home equity conversion mortgage (HECM) lender in the U.S., has to offer. It’s an approved lender of the U.S. Department of Housing and Urban Development (HUD) and holds accreditation from the Better Business Bureau (BBB). Both credentials indicate that Top Flite Financial is a reputable lender you can trust.

Here’s a closer look at Top Flite Financial’s reverse mortgage loan offerings:

• Retain title to your home
• Many financially saving retirees use a HECM as a financing tool
• It’s a specialized loan
• Your equity is subject to the housing market
• FHA insured HECM’s are fully guaranteed
• FHA now allows a non-borrowing spouse under 62 to be on title and retain all rights to the property if their spouse were to pass before them

To learn more or take the next step towards securing a reverse mortgage with Top Flite Financial, request a free consultation by filling out this form online.

Frequently Asked Questions