What is a Reverse Mortgage Loan, and Is It Right for You?

3 Min. Read

Getting older comes with some pretty fantastic advantages: Wisdom, experience, and plenty of time to finally enjoy that impressive music or book collection. Many retirees and seniors during this time are considered “House rich, cash poor,” which is why the Reverse Mortgage, sometimes known as a Reverse Annuity Mortgage (RAM), was created.

What is the Definition of a Reverse Mortgage?

A home loan for seniors (62+) that allows them to access their home equity as cash, with no payments required until they move, sell the home, or pass away. Your home can be a powerful asset, and a reverse mortgage uses it as collateral for a cash loan.

What is a Reverse Mortgage Example?

Reverse Mortgages help retirees or senior citizens with limited income, but who own their own home, access an added line of credit for living expenses, medical bills, debt, or even fun!

How Does a Reverse Mortgage Work? 

In a regular mortgage, you borrow a lump sum and pay it back in monthly installments, plus interest, with your balance going down over time. In a reverse mortgage, you borrow an amount based on your home equity which you don’t have to pay back until you leave the home. Each month interest is accumulated with the total balance going up over time.

The three types of reverse mortgages, each with their pros and cons, are:

• Proprietary Reverse Mortgage

A private loan that can provide a larger loan advance, especially with a higher-valued home. However, this type of reverse mortgage is not guaranteed by the government.

• Single-Purpose Reverse Mortgage

A lump sum loan provided by nonprofits, state and municipal governments for specific purposes like home repairs or renovations. Need a new roof? This is the reverse mortgage for you!

• Home Equity Conversion Mortgage (HECM)

This is the most common type, where borrowers have the option of receiving a lump sum, monthly installments, or a mix. It can have more expensive fees, but the loan can be used for almost anything.

It is insured by the Federal Housing Administration (FHA) and backed by the United States Department of Housing and Urban Development (HUD).

It also includes an added cost of an Upfront Mortgage Insurance Premium which ensures you will never owe more than your home is worth, even if your loan balance exceeds your home’s value.

Who Is a Reverse Mortgage Right For?

• Seniors looking for extra income for expenses, healthcare, or debt.
• Homeowners who want to stay in their home, but need additional income for home renovations, repairs or expenses.
• People who don’t mind using the sale of their home to repay the loan after they’re gone.

How Do You Pay Back a Reverse Mortgage? 

• Most commonly, the loan is repaid by selling the home.
• If the homeowner or heirs want to keep the house, they can use savings, or another loan, to pay it off.
• With a HECM reverse mortgage, if your home sells for less than the balance of the loan, the homeowner or heirs are not responsible for the difference, it is covered by FHA insurance.

Why Do Banks Not Recommend Reverse Mortgages?

• They can have higher fees & interest than traditional loans.
• The loan balance increases over time, increasing debt.
• If property taxes, insurance, or maintenance are neglected, the loan can default. This means either repaying the loan in full, loss of home equity or a risk of foreclosure.
• Your heirs may have to sell the home to repay the loan, impacting their finances, so be sure to discuss it with your family.

Can You Refinance a Reverse Mortgage? 

Definitely. You can refinance it for a better interest rate, to change to another reverse mortgage program, to borrow more money if the value of your home increases. So, let’s hope they put in that fancy golf course next door!

Can I Lose my Home with a Reverse Mortgage?

Yes. Your loan will have rules to follow, like continuing to pay your property taxes and homeowners insurance, maintaining the home, and not moving out of the home for too long, like an extended nursing home stay. If you do not abide by these rules, you may lose your home.

Who Owns the House in a Reverse Mortgage? 

You do. As the homeowner, you keep the title to your house. However, the lender does have a lien on it, meaning they have the right to take action like foreclosure, if the homeowner fails to repay what is owed.