Among all home loan products, the reverse mortgage might be the most controversial. Critics point to the possibility of losing your home, but that could be said of regular mortgages too—you could lose your home to foreclosure.
Banks offer a variety of loan products (mortgages, personal loans, lines of credit) because no single loan is right for everyone. Just as people approach home buying at different stages in their life, with different goals, they also face home selling at different stages. A reverse mortgage is more closely related to selling a home than buying one.
Let's answer your most common questions about reverse mortgages, including:
- What is a reverse mortgage?
- Who should consider a reverse mortgage
- Can I lose my house with a reverse mortgage?
- After a reverse mortgage, can I rent out the home and travel?
- What happens if one day I owe more than the home is worth?
- The good and bad points of a reverse mortgage
“The bottom line: If you don’t understand the cost or features of a reverse mortgage, walk away. If you feel pressure or urgency to complete the deal—walk away.”—FTC Consumer Advice
A reverse mortgage works like the presale of your home in that it generates income for you now when you need it and can make the most of it, with repayment deferred until you don't need the home anymore.
To be blunt, you can't enjoy the proceeds from the sale of your home after you're dead, so a reverse mortgage is a way of spending the proceeds now.
Some homeowners are in situations where a reverse mortgage is a good option, and they go into the loan knowing that they do not face "losing" the home they were very likely going to sell later anyway. Rather, they are leveraging the equity they have built up in their home to get money to live on in the present day.
If you're a longtime homeowner with certain circumstances and goals, a reverse mortgage could appeal to you, although don't overlook better, safer options for getting money from your home equity, such as with a cash-out refinance mortgage.
Why Do They Call It a "Reverse" Mortgage?
An ordinary mortgage is when you borrow money to buy a home. From the first dollar you pay on the loan principal, you start building equity (a fancy term for home ownership). Money flows in one direction, from you to the bank.
A reverse mortgage reverses the flow of money from the bank to you by generating payments based on your home's value. The bank wagers that it will earn its money back (plus interest) the day the home sells. The bank is willing to defer loan repayment until you move, sell, or pass away.
A reverse mortgage is an income strategy for older homeowners who want to stay in their home, not sell it to fund their golden years elsewhere.
A typical way for older homeowners to cash in on the appreciation of their home is to sell after retirement and downsize. This can mean not only buying a smaller home but also a home in a more affordable region now that proximity to jobs and schools is no longer a concern.
Downsizing is a fine strategy for older homeowners who want to relocate, but some know they want to stay put. A reverse mortgage is meant to appeal to them.
Homeowners are still responsible for paying property taxes and homeowners insurance and for regular maintenance. Failure to do so could trigger repayment of a reverse mortgage.
A regular influx of cash can make all the difference to seniors having a hard time making ends meet. However, a reverse mortgage is but one strategy for retirement income. A financial advisor can tell you about other options.
How Much Money Can I Get From a Reverse Mortgage?
Maybe 60%-80% of your home's appraised value—that's the short, general answer. It depends on three factors: your age, the interest rate you can get, and your home's value.
One of the many requirements of a reverse mortgage is that any existing mortgage must be paid off in the transaction, so the amount you can borrow with a reverse mortgage may not be the amount you can keep.
Example: Let's say you get $150,000 through a reverse mortgage but owe $60,000 on the old mortgage. You also owe as much as 11% of $150,000 in closing costs for the reverse mortgage—that's $16,500. You'll end up with $73,500 in cash but will be on the hook for the original $150,000 loan amount.
You can receive the money from a reverse mortgage in three ways:
- Lump sum
- Monthly payments
- Line of credit
According to a 2016 HUD report, just over 17.5% of reverse mortgages go into "technical default" because the homeowner didn't pay property taxes, didn't keep the house insured, or neglected routine maintenance.
Reverse mortgages have strict requirements, such as that you must primarily reside in the house, maintain the property well, and stay current on all taxes and insurance. The more requirements, the more opportunities to fail. Soaring home values over the past several years have raised property taxes in many states, placing a financial burden on seniors living on a fixed income.
Critics of reverse mortgages think they have so many requirements for one devious reason: To catch the homeowner out and thus trigger repayment. "Unlike regular home mortgages, things such as falling behind on taxes or insurance payments can quickly result in the mortgage company foreclosing," writes Melanie Payne in the Naples Daily News.
Beware the risks.
We mentioned how rising property taxes are more burdensome on seniors, and another way a reverse mortgage might put seniors at risk is with a residency requirement too inflexible to allow for temporary medical absences.
For example, relocating to a convalescent home for a few months to recover from a broken hip could be enough to violate the requirement of residing in the home. That isn't true with a government-backed HECM type of reverse mortgage, but it was what Barry Gysbers of Washington found in the fine print of a reverse mortgage his elderly mother was lured into signing by a predatory lender.
He writes, “What is the single, most common medical event that happens to many elderly women in their 80s and 90s? Right you are. They fall down and fracture their hip. Which requires extensive rehab … In the fine print, the contract reads, 'If not inhabited for a period of 90 days or more, the entire loan balance becomes due and payable'!"
The reputation of reverse mortgages isn't helped by the number of scams out there, either. Bottom-feeding lenders will target seniors under financial strain with reverse mortgages made to sound like miracle cures. This is why experts say that it's a red flag when any reverse mortgage salesperson touts these home loans as the answer to all your problems, or if the person already has ideas for how you should spend or invest the money.
Other mortgage options.
If a reverse mortgage doesn't appeal to you, but you still need cash, consider the alternatives, such as refinancing your mortgage or taking out a home equity loan.
“Reverse mortgages are complex loans, making them the perfect breeding ground for a scam.”—HUD bulletin, Dec. 2022
When people outgrow their home, they enter retirement, or their job changes, they often think about renting out their home and downsizing, traveling, or both. You might wonder if you can take out a reverse mortage on your current home, then rent it out.
While rental income is a solid moneymaking strategy, it can't be mixed with a reverse mortgage.
Why not? Because a reverse mortgage doesn't merely let homeowners keep living in their home, it requires that they live in their home. A reverse mortgage is intended to generate income to homeowners while keeping a roof over their head (to allow them to "age in place"), not to fund relocation to sunnier and less expensive locales.
According to the Consumer Financial Protection Bureau (CFPB), every year you must certify in writing that you occupy your home as your principal residence. You can lose your home to foreclosure if you have a reverse mortgage loan and:
- Are absent from your home for a majority of a year for a nonmedical reason; or
- Are absent from your home more than twelve months in a row for healthcare purposes.
Los Angeles bankruptcy attorney Leon Bayer warns that a reverse mortgage can trap you in your home because moving would gain you nothing. "The unfortunate effect on many borrowers of a reverse mortgage is that they essentially sold their home when they got the loan. I say that because they have the right to live there, but it becomes difficult or impossible to ever get any more money out if you want to sell and buy somewhere else."
Could the Home Lender Force Me to Repay the Reverse Mortgage Early?
You could do something to trigger repayment, but otherwise the bank defers repayment until you move, sell, or pass away.
One way to trigger repayment is to stop using the home as your primary residence, which is why renting it out wouldn't work (see previous question). Other ways to trigger repayment are to neglect home maintenance, to fall behind on property taxes, or to lapse on your homeowners insurance.
Predatory lenders won't always assess your situation fairly, either. Stories abound of reverse mortgage borrowers being spuriously accused of moving away, and of lenders relying on a "drive-by assessment" to determine that that property is poorly maintained.
Does the Loan Balance Keep Growing?
Yes, it surely does. For the life of the reverse mortgage the balance keeps growing. Rolled into it are the loan principal and the interest, plus the origination fees if you chose to roll those in.
Because a reverse mortgage requires no repayment so long as the homeowner complies with all the terms of the loan, the interest on the loan gets added to the balance every month. It's like a credit card you never make payments on, but unlike a credit card, someone will have to pay it after you're gone. Or after you move or sell.
Since the balance never stops growing, eventually it could eclipse the home's value, but borrowers (or their estate) are usually not required to pay back any loan balance in excess of what the home is worth.
This consumer protection comes with the most common type of reverse mortgage loan, known as a home equity conversion mortgage (HECM). You definitely want to make your reverse mortgage through this FHA program so that you get this important federally backed protection.
The CFPB writes: "When the last remaining borrower passes away, the loan has to be repaid. Most heirs will repay the loan by selling the home. If your loan balance is more than the value of your home, your heirs won’t have to pay more than 95 percent [recently upped to 98 percent] of the appraised value. The remaining balance of the loan is covered by mortgage insurance."
Are All Reverse Mortgage Programs Alike?
No, they aren't. Stick to the HECM type made through the FHA program described above. If your reverse mortgage is not done through the FHA program, it probably won't have the crucial consumer protection that keeps you or your heirs from having to pay back a bloated loan balance larger than the home's value.
We repeat: If you are considering a reverse mortgage, look into the type made through the FHA program because it eliminates one of the major downsides of a reverse mortgage by never letting the loan balance exceed the appraised value of the home.
One stipulation of the FHA program is that you must be at least 62, and so must your spouse.
In a previous article, we discussed the pros and cons of a reverse mortgage. We expand upon them here.
Good things about a reverse mortgage:
- You can stay in your home instead of having to downsize.
- The proceeds of a reverse mortgage can be used to pay off your existing mortgage.
- The loan doesn't need to be repaid until you move out or pass away, so long as you comply with the terms.
- Reverse mortgage money you receive is not taxed by the IRS, unlike income from retirement accounts.
- Often, reverse mortgages don't have income or credit requirements.
Bad things about a reverse mortgage:
- Beware reverse mortgage scams designed to trick seniors.
- Reverse mortgages are expensive, with mortgage insurance up to 2.5% of the home's value, high interest rates, and numerous fees.
- The loan balance never stops growing unless you get a reverse mortgage that caps it, as a home equity conversion mortgage (HECM) does.
- If you fail to uphold any of the terms of the reverse mortgage (e.g., required home maintenance, paying property taxes and homeowners insurance, and staying in the home), you will trigger early repayment.
- Only the original borrower has the right to remain in the home till death. A new spouse or anyone else in the home (adult child, housemate, etc.) must move out or buy the home when the original borrower passes.
- The number one way a reverse mortgage gets repaid is by the sale of the house, so it's unlikely that your heirs will live there.
Where Can I Get Unbiased Advice About a Reverse Mortgage?
If you are considering taking out a reverse mortgage, talk with a counselor from an independent government-approved housing counseling agency because a salesperson is not likely to have your best interest in mind. That link will take you to an article by the CFPB, where they share important questions to ask about reverse mortgages. They also provide a search tool and a phone number, two ways you can find a counselor.
Reverse Mortgage Takeaways
- A reverse mortgage keeps you in your home, which, depending on your lifestyle, is either a pro or a con.
- If you have few other options for regular cash in retirement and are unconcerned about bequeathing your home, a reverse mortgage could be worth considering.
- Make sure any reverse mortgage you consider carries the FHA mortgage insurance so the loan balance will never eclipse the home's value.