The basics of a Reverse Mortgage
For homeowners aged 62 and older, a Reverse Mortgage offers a way to convert equity into cash.
The Reverse Mortgage was first created in 1961. It was granted to a widow in Portland, Maine, to allow her to stay in her home after losing her husband. In 1988, reverse lending was made official when President Reagan signed the Reverse Mortgage bill into a law. This law gave the HUD (U.S. Department of Housing and Urban Development) the authority to insure Reverse Loans through the FHA.
Fast forward to today, and the Reverse Mortgage, also called a Home Equity Conversion Mortgage (HECM), has seen significant developments—as well as an uptick in popularity. Reverse Mortgage activity increased throughout the pandemic, helping seniors needing additional cash. Even into 2022, Reverse/HECM Loan volume remained above or close to average.
These days, older Americans are living longer, and healthcare costs and living expenses are rising. Fortunately, the average homeowner’s equity has also risen to record levels. A Reverse Loan isn’t for everyone. But for many aging homeowners, it can provide a financial safety net, offering a much-needed solution.
6 big questions about Reverse Mortgages, answered
Misinformation about Reverse Mortgages is everywhere. These answers can help clear up the confusion:
1. How is a Reverse Mortgage different from a regular mortgage?
Like a traditional mortgage, a Reverse Mortgage allows a homeowner to borrow a loan using their house as security. Also like a standard mortgage, your home’s title remains in your name when you take out a Reverse/HECM Loan.
But unlike a traditional mortgage:
- A borrower doesn’t make monthly mortgage payments on a Reverse Mortgage.
- The loan will be paid back when the borrower stops living in their house. Interest/fees are added onto the loan’s balance every month, causing the balance to grow.
- A homeowner is still required to pay homeowners insurance/property tax, live in the home as their primary residence, and make sure their house stays in good condition.
With a Reverse/HECM Loan, the amount that a homeowner owes increases—instead of decreasing—over time. This happens as interest/fees add to the loan’s balance each month. As your loan balance goes up, your home’s equity goes down.
A Reverse Mortgage isn’t free money. It’s an actual loan where borrowed money plus interest plus fees contribute to a rising loan balance each month. Eventually, the homeowner or their heirs will have to pay back the mortgage, typically by selling the house.
2. What can you use it for?
Here are some of the most common reasons homeowners and homebuyers aged 62 and older take out a Reverse Loan:
- Pay off an existing first mortgage (or other real estate-secured debt) with the proceeds received.
- Refinance an existing Reverse/HECM Loan to access a larger line of credit.
- Eliminate a current monthly mortgage payment, helping those finding it harder to afford their home.*
- Supplement retirement or fixed income—offering an increase in monthly funds/cash.
- Pay down high-interest credit card debt or pay for home improvements.
- Set up an emergency medical fund or cover long-term care expenses.
- Move into a new home that better fits an aging homeowner’s needs.
For many borrowers, a Reverse Loan can also be easier to qualify for. If you’ve hit roadblocks when applying for a traditional purchase or refinance mortgage, a Reverse Loan might be another option.
*Although there are no monthly mortgage payments, the borrower will continue to be responsible for paying property taxes, homeowners insurance, property charges, and maintaining the home.
3. Do you get to keep your house?
Absolutely. Contrary to what you might have heard, taking out a Reverse/Home Equity Conversion Mortgage doesn’t mean “the bank owns your house.” Just like a traditional mortgage, as long as the terms of the loan are met (such as paying property taxes, homeowners insurance, property charges, and maintenance), you’ll retain full homeownership and can sell your house at any time.
4. How do you receive your funds?
You can collect the proceeds of your HECM/Reverse Loan as a lump sum; monthly payments for a specified time or for as long as you live in the home; a line of credit; or a combination of these. The funds can be used any way you wish, including supplementing your income, paying for a large expense, or preparing for future needs.
Reverse payouts aren’t considered income and won’t affect Medicare or Social Security benefits.*
The amount you could receive depends on a handful of individual factors—like the age of the youngest borrower or eligible non-borrowing spouse, your home’s value, the amount of equity you have, FHA lending limits, the current interest rate, and the Reverse Loan product and payment option you choose. Your Loan Officer can provide you with a quote that’s tailored to you, at no cost or obligation.
For answers to all your Reverse Mortgage questions: Contact an Academy Loan Officer near you.
*Please consult a retirement or financial planner for advice and guidance on Medicare and Social Security benefits planning strategies.
5. How does this affect your heirs?
If a borrower takes out a Reverse/Home Equity Conversion Mortgage, they can still leave their home to their heirs. When the borrower passes away, their heirs may either:
- Pay the balance due on the Reverse Loan (principal plus accumulated interest and Mortgage Insurance Premium) and keep the house.
- Sell the house and use the proceeds to pay off the Reverse Mortgage.
If heirs choose to sell the home, any remaining equity after the Reverse Loan is repaid is theirs to keep.
6. How do you qualify?
To be eligible for an HECM/Reverse Loan:
- All borrowers must be aged 62 or older.
- The home must be your primary residence and meet Federal Housing Authority (FHA) minimum property standards.
- You must have sufficient home equity—typically at least 50 percent.
- Counseling must be completed with an HUD-approved counselor to make sure you understand all potential risks and responsibilities.
Many homeowners are under the impression that a Reverse Mortgage should only be used as a last resort. But a Reverse Loan can actually be used strategically to support financial planning. For example, monthly advances may help you supplement your retirement income so you can avoid liquidating invested assets. Your Academy Loan Officer can work with your financial advisor to help you develop a sound plan for the future.
Is a Reverse Mortgage right for you?
At Academy Mortgage, we take a responsible approach to Reverse Mortgages. This means we’ll work hard to find the loan program that fits your life. If a Reverse Loan isn’t ideal, we’ll help you explore other options. Connect with an Academy Loan Officer to see if you qualify.
Loans are subject to approval; restriction and additional requirement may apply. Rates, product terms, and conditions are subject to change without notice. This is not an offer for extension of credit or a commitment to lend. Please contact Academy Mortgage for more information. MAC823-1482876.
Please note: The information in this blog is based on an FHA HECM (Federal Housing Administration Home Equity Conversion Mortgage) mortgage product, which is a type of mortgage loan. There are fees associated with this loan, as well as compounding interest. The loan is not a government benefit and must be repaid. There is no guarantee of financial security, and the consumer is responsible to pay the property taxes, homeowners insurance, and property maintenance fees independent of the loan, which can be a significant cost. The consumer faces a risk of foreclosure if they do not meet these obligations. For more information about the FHA HECM Reverse Mortgage product, visit HUD.gov.