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With a reverse mortgage, you can borrow against equity while still maintaining ownership of your home. But be mindful of the costs and potential risks.
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What's in this guide?
How reverse mortgages work
A reverse mortgage allows homeowners 62 and older to convert part of the equity in their property into cash without having to give up ownership or take on monthly mortgage payments. When offered through an FHA-approved lender, these are also known as home equity conversion mortgages (HECM).
It’s called a reverse mortgage because the lender makes payments to the borrower, instead of the borrower making monthly payments to the lender. Depending on the type of reverse mortgage, you can get a lump sum, monthly payments or a line of credit.
The loan is then repaid when you either die or decide to sell the property.
Are reverse mortgages risky?
Yes. If you’re unable to pay your taxes or homeowners insurance, you can lose your home.
There have been reports of foreclosed homes after homeowners were accidentally late on insurance payments and seniors who were kicked out of their homes after their spouse died. Over 100,000 reverse mortgages have failed since the Great Recession, according to a 2019 report by USA Today.
While regulatory bodies like the US Federal Housing Administration (FHA) and Housing and Urban Development (HUD) review the structure and terms of reverse mortgages to ensure they meet industry standards, these loans are still far from risk-free. And reverse mortgages from non-FHA lenders can have looser guidelines, increasing the risk.
Do I qualify for a reverse mortgage?
Generally, to qualify for a reverse mortgage in the US, you must satisfy general criteria:
- The youngest borrower must be at least 62 years old.
- You must own the property or purchase the property as your primary residence.
- The property must comply with FHA appraisal guidelines.
- You must have a sufficient amount of equity.
Credit score requirements
Because you don’t make monthly payments on a reverse mortgage, lenders generally don’t have a required minimum credit score. But a lender may still check your credit file to make sure you don’t have other debts that would impact your ability to pay homeowners insurance and taxes on time. And a history of delinquent payments can decrease your chances of being approved.
Costs and fees
Reverse mortgages are generally more expensive than traditional home loans. Costs can include:
- Application fee. Some lenders may charge a fee to apply.
- Origination fee. Origination fees vary by lender, but can’t exceed $6,000.
- Reverse mortgage counseling. In order to get a reverse mortgage, you’ll need to attend counseling with a HUD-approved reverse mortgage counselor. The cost can vary by counselor, but they generally can’t charge you a fee if you can’t afford it, and they’ll disclose the cost up front.
- Other closing costs. You’ll need to pay closing costs associated with a traditional home loan, like appraisal, mortgage, inspection and credit check fees.
- Mortgage insurance premium. HUD requires all borrowers to take out insurance as a precautionary measure to ensure that you never owe more than the value of your property.
- Ongoing fees. You’ll need to continue to pay for taxes and homeowners insurance, along with interest and servicing fees for the loan.
How to apply
- Attend counseling. Before you can submit an application with any lender, you’ll need to complete the required counseling and submit a signed Certificate of HECM Counseling. To find a counselor, you can call (800) 569-4287 or search the HECM Counselor Roster online.
- Compare lenders. Next, compare reverse mortgage lenders to find one you’re comfortable with that offers the type of reverse mortgage you need.
- Submit an application. The application process will vary by lender, but you’ll usually be able to get started online. Some lenders also offer in-person or phone-based help.
- Get your home appraised. You’ll need to have your home appraised before you can get a reverse mortgage.
- Submit supporting documents. This can include appraisal and inspection documents, bank statements, tax returns and other financial documents.
- Close the loan. Depending on the lender, you may need to sign the loan documents in person.
How do I compare reverse mortgage lenders?
Compare lenders based on:
- Rates. You’ll be charged interest on any payments you receive from a lender. The lower your interest rate, the slower your equity will decline.
- Closing costs. Compare all of the closing costs, paying special attention to the origination fee, which tends to be one of the priciest fees.
- Trustworthiness. Some reverse mortgage lenders have a reputation for foreclosing on a home as soon as one homeowners insurance payment is late. Spend some time researching lenders to find out if they have a history of foreclosing homes and/or if they’ve been sued by the government for unfair mortgage practices.
- Reviews. Check both professional reviews on Finder and customer reviews on sites like the BBB and Trustpilot to learn more about the lender and how current and past customers feel.
Pros and cons of a reverse mortgage
- No monthly payments. As long as your home is your primary residence, you continue maintaining it and you’re current on property taxes and insurance, you don’t have to pay your lender monthly. The loan isn’t due until you move out of the property, though you can repay it at any time without prepayment penalties.
- Access to funds. By borrowing against the equity in your home, you can convert a portion of your equity into cash, which can help fund your retirement and free up your cash flow.
- No restriction on funds. For HECMs and private-sector reverse mortgages, you can use your however you’d like — to fund a grandchild’s education, go on a vacation, pay for medical expenses or pay for retirement accommodation.
- High costs. Reverse mortgages are often more expensive than traditional mortgage types due to high upfront and ongoing costs like origination, mortgage insurance and title insurance fees that can set you back up to $35,000.
- Duty to repay loan. If you find yourself needing to permanently leave your home due to medical or other reasons, you must be prepared to pay back the full loan.
- Family inheritance. A reverse mortgage can decrease the amount of equity you have in your property, leaving less money for your family when you die.
- Risky. If you’re late on property taxes or homeowners insurance, you could lose your home.
How much am I eligible for?
How much you might get with a reverse mortgage ultimately depends on your property’s value and your age. Generally, you’re eligible for a larger loan amount the older you are and the more your property is worth.
A reverse mortgage is an unconventional option for seniors looking to cash in on their home’s equity without relinquishing ownership of their property. But you’ll want to understand your responsibility to avoid inadvertently losing your home or eating into an inheritance you’re hoping to pass along to your family.
If you still owe on your home and want to refinance to lower your payment, or if you’re looking to downsize, compare other mortgage options.
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