A Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, is a special type of home loan only for homeowners who are 62 and older.
A reverse mortgage loan, like a traditional mortgage, allows homeowners to borrow money using their home as security for the loan. Also like a traditional mortgage, when you take out a reverse mortgage loan, the title to your home remains in your name. However, unlike a traditional mortgage, with a reverse mortgage loan, borrowers don’t make monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. Interest and fees are added to the loan balance each month and the balance grows.
With a reverse mortgage loan, homeowners are required to pay property taxes and homeowners insurance, use the property as their principal residence, and keep their house in good condition.
With a reverse mortgage loan, the amount the homeowner owes to the lender goes up–not down–over time. This is because interest and fees are added to the loan balance each month. As your loan balance increases, your home equity decreases.
A reverse mortgage loan is not free money. It is a loan where borrowed money + interest + fees each month = rising loan balance. The homeowners or their heirs will eventually have to pay back the loan, usually by selling the home.
Aside from age, there are a few other requirements for taking out a reverse mortgage, including:
Your home must be your principal residence, meaning it must be where you spend the majority of the year
You must either own your home outright or have a low mortgage balance. Owning your home outright means you do not have a mortgage on it anymore. If you have a mortgage balance, you must be able to pay it off when you close on the reverse mortgage. You can use your own funds or money from the reverse mortgage to pay off your existing mortgage balance
You may not be delinquent on any federal debt, such as federal income taxes or federal student loans. You may, however, use funds from the reverse mortgage to pay off this debt
You must agree to set aside a portion of the reverse mortgage funds at your loan closing or have enough of your own money to pay ongoing property charges, including taxes and insurance, as well as maintenance and repair costs
Your home has to be in good shape. If your house does not meet the required property standards, the lender will tell you what repairs need to be made before you can get a reverse mortgage loan
You must receive counseling from a HUD-approved reverse mortgage counseling agency to discuss your eligibility, the financial implications of the loan, and other alternatives
Note: This information only applies to Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage loans.
If you need a referral for a good reverse mortgage company, please don't hesitate to reach out to me!
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