What is a reverse mortgage?
A reverse mortgage is a special kind of home loan that lets you convert a portion of the equity in your home into cash.
How is a reverse mortgage different from a traditional mortgage or home equity loan?
Unlike a mortgage or home equity loan, you do not have to make monthly payments.
Who offers reverse mortgages?
Most reverse mortgages are insured by the United States Department of Housing and Urban Development (HUD) Federal Housing Administration (FHA) as a Home Equity Conversion Mortgage (HECM). Privately insured reverse mortgages nearly vanished during the recession. Some private reverse mortgages are still available for very high value homes.
How do you qualify for a HECM loan?
To qualify for a HECM, you must:
- Be 62 years of age or older,
- Own your home with no mortgage or have a mortgage balance that is small enough to be paid off with the proceeds of the reverse mortgage,
- Live in your home,
- Be able to pay real estate taxes, utilities, and hazard and flood insurance premiums on the home, and
- Get consumer information from a HUD-approved HECM counselor.
How much money can I get from my home?
Generally, the more valuable your home is, the older you are, and the lower the interest rate, then the more you can borrow. The amount you can get depends on your age, the current interest rate, and the appraised value of your home.
How can you get the money from the HECM loan?
You have 5 options for getting HECM loan money:
- Tenure – equal monthly payments for as long as you continue to live in the home
- Term – equal monthly payments for a fixed period of months that you select
- Line of credit – payments or installments at times and in amounts of your choosing, until the line of credit is exhausted
- Modified tenure – combination of line of credit with monthly payments for as long as you continue to live in the home
- Modified term – combination of line of credit with monthly payments for a fixed period of months that you select
How can HECM loan money be used?
HECM loan proceeds can be used for any legitimate purpose, such as to supplement Social Security or retirement benefits, home maintenance, payment of real estate taxes and insurance, medical bills, and living expenses.
When must a HECM loan be repaid?
A HECM loan must be repaid when:
- You die;
- You sell the home;
- You move to another home;
- Due to physical or mental illness, you no longer live in the home for more than 12 months in a row;
- You do not pay the taxes or insurance or violate any other borrower obligation (for example, you fail to keep the home in good repair).
What is the cost of a HECM loan?
The costs of a HECM loan usually include an origination fee, closing costs, a mortgage insurance premium, a servicing fee, and interest. You should never pay a fee to a planner or loan finder to get a HECM loan.
What should I consider before taking a reverse mortgage?
As of late 2012, nearly 1 in 10 reverse mortgages were in default. Before taking a reverse mortgage, consider:
- The cost of real estate taxes and insurance. You are at risk of foreclosure if you fall behind on these expenses.
- Taking proceeds in monthly installments, instead of lump sum. By taking proceeds in lump sum and using them to meet basic living expenses, you may outlive your life expectancy and be left with no equity for your remaining years.
- Potential risks for couples. If your husband borrows the reverse mortgage in his name only and you outlive your husband, you would be left to pay the reverse mortgage loan in full in order to keep the home.
Reverse mortgages are complex, and the terms can be confusing. You should talk to an attorney before getting a reverse mortgage.
What are some additional resources about reverse mortgage?
- HUD’s website: www.hud.gov/groups/seniors.cfm
- AARP Reverse Mortgage website: www.aarp.org/revmort/
- National Reverse Mortgage Lender’s Association: www.reversemortgage.org
Acknowledgements & Disclaimer: This Fact Sheet was prepared by West Tennessee Legal Services (WTLS) and made possible by Serving Tennessee Seniors-administered by The Community Foundation of Middle Tennessee at the request of the Chancery Court. WTLS thanks the Tennessee Bar Association for its permission to use The Legal Handbook for Tennessee Seniors (2014 edition) as a primary information source. This publication is supported, in part, by funds provided by the Southwest Area Agency on Aging and Disability, the Tennessee Commission on Aging and Disability, and the U.S. Department of Health and Human Services. The content herein does not necessarily reflect the opinion or policy of the Southwest Area Agency on Aging and Disability or any agency of Tennessee or the U.S. government. Fact Sheets are for information only and not intended to replace legal advice. If you are in need of legal help, call WTLS at (800) 372-8346, or seek the help of a private attorney. (Revised 5/2017)