Before reverse mortgages, homeowners had two ways to get money from their homes:
- Sell it and move, or
- Borrow against it, which would require making monthly loan repayments.
Now, with reverse mortgages, you don't have to choose between moving from your home or making regular loan repayments.
A reverse mortgage is a loan against your home that you don’t have to pay back as long as you live in the home as your primary residence, continue paying your taxes and insurance, and keep up with home maintenance. One of the most appealing things about a reverse mortgage is that you don't make monthly mortgage payments like a regular mortgage. The funds you receive from a reverse mortgage will depend on your age, your home's location and appraised value and the cost of the loan. Payments can be given all at once in a lump sum, as a regular monthly term payment or through a line of credit at times and in amounts that you choose. The loan balance becomes due and payable when you pass away, sell your home, permanently move out of your home or if you fail to abide by the loan terms.
Five facts you should know to decide if a reverse mortgage is for you:
You choose which payout option is best for you.
As mentioned before, you can receive the loan funds in several ways:
- Monthly payments that run as long as one borrower remains alive and living in the home.
- Fixed term of payments, after which you will no longer receive money, even if you still live in the home.
- Flexible line of credit that allows you to choose how much and when to use the loan funds.
- A one-time, lump sum payment of loan proceeds.
You can combine all three disbursement options for an immediate cash advance, credit line and monthly term payment.
Reverse mortgages offer only a portion of your home equity.
Keep in mind that you won't be able to access all the equity in your home with a reverse mortgage. The Federal Housing Administration (FHA) calculates the maximum mortgage amount based on a few different factors. These factors include the age of the youngest borrower, current interest rates and your home's appraised value. In addition, fees are associated with obtaining a reverse mortgage, but they can be worked into the loan to reduce costs and make the process affordable.
The name on the reverse mortgage matters.
While you may want to list just the oldest member of the household as the borrower on the loan, the funds from a reverse mortgage are available only to the borrower. If the only-named borrower has passed away or entered a long-term care facility, family members will not be able to access any additional funds from the reverse mortgage. Talk to your loan specialist or HECM counselor before you decide to put only one name on the loan. Non-borrowing spouses may qualify for a repayment deferral, but it's important to understand that process before making any decisions.
A reverse mortgage involves the whole family.
Be sure to include your family in the decision as you consider whether a reverse mortgage is right for you. If you have adult children or other people living in your house, make sure everyone is aware of what happens if you, the borrower, no longer live there. The non-borrowing spouse or other family members do have options, but it's important to understand these options in advance.
Common reverse mortgage misconceptions
A reverse mortgage is much like other mortgages in which borrowers use their home equity to pay other expenses; however, a reverse mortgage has special terms for people age 62 and older. With a reverse mortgage, you retain the title to the home. Social Security and Medicare will not be affected by this type of loan. Just like any mortgage, borrowers remain responsible for paying property taxes, insurance and the upkeep of the home. Funds from a reverse mortgage can be used in any way you choose, so you can use your loan funds to pay for home repairs, medical expenses or any other needs.
Read more about reverse mortgage disbursement options or continue to the next section on the pros and cons of a reverse mortgage.