A reverse mortgage is a loan secured by your home. It lets an eligible older homeowner borrow against part of the home's value without a required monthly principal-and-interest payment, as long as the loan remains in good standing. Reverse mortgages are not one-size-fits-all. Proprietary loans, often called jumbo reverse mortgages, can differ from federally insured options in minimum age, loan limits, payout choices and borrower protections.
Whatever the product, you keep title, and the lender holds a lien, just as a traditional mortgage lender does. Consumer safeguards like a financial assessment and counseling may be required before closing. The exact rules are set by the product, so ask the lender to identify the loan type and explain its requirements in writing.
To see what that actually means day to day, it helps to look at three stages: structuring the loan, what happens while the loan is open, and how it is repaid.
Structuring the Loan
The amount you can borrow is not the home's full value. What you qualify for depends on the age of the youngest borrower, the home's appraised value, the interest rate, current liens, closing costs and the program's loan limits. Each product sets its own eligibility, underwriting and early-draw rules. Any existing mortgage and other required liens get paid off first, out of the loan proceeds. A lender needs your actual numbers to give a reliable estimate.
Depending on the product and rate type, reverse mortgage proceeds may be available as:
- A line of credit
- A lump sum
- Monthly advances
- Funds toward the purchase of a new home
- A combination of the available options
Not every product offers every choice. Fixed-rate and adjustable-rate products may work differently, and early-draw limits may apply.
During the Loan
Once the loan is in place, monthly principal-and-interest payments are not required. But that does not mean no monthly housing costs and missing these obligations can lead to default and foreclosure.
To keep the loan in good standing, you need to:
- Live in the home as your principal residence
- Remain current on property taxes, required insurance coverage and any applicable association dues
- Maintain the home and complete required repairs
As you draw money, the amount you receive, plus interest and loan charges, is added to the loan balance instead of being paid down each month. The balance grows over time, and your equity in the home may shrink as a result. Although home price appreciation is not guaranteed, it can offset some of that.
Repayment
The loan becomes due and payable when the last remaining borrower dies, sells the home, moves out permanently or stops meeting the loan's terms. If you have a spouse who is not a borrower, ask before closing whether and how they could stay in the home if you pass away first. Spouse protections and repayment timing differ by product, so get the specifics in writing.
Many reverse mortgages are structured as non-recourse loans. That generally means the lender looks to the home, not the borrower's other assets, to satisfy the loan, subject to the exact terms. It does not mean the balance disappears. The rules for a shortfall, and the amount heirs would need to pay to keep the home, vary by product. Get those terms in writing before closing.
Common ways to settle the loan include:
- Sell the home and repay the balance from the sale proceeds
- Refinance the balance into a new loan
- Repay the balance with other funds
- Transfer the property through a deed in lieu of foreclosure, if accepted by the lender
Is It the Right Fit?
Most people start with, "How much can I get?" I start one step earlier: "What does the money need to do?" A reverse mortgage tends to make the most sense when you plan to stay in the home, have a clear use for the funds and can keep up with the home's ongoing expenses. It is a harder fit if a move is likely soon, unless you are using the reverse mortgage to purchase the property. Before deciding, compare it against your other options, including selling or downsizing, a traditional refinance, or a home equity loan or line of credit. Start with the problem you are trying to solve, not the amount you could receive.
If you would like to discuss your scenario, contact me at 714-875-7979.
This information is intended to be general and educational in nature and should not be construed as financial advice. Borrowers must occupy the home as their primary residence and remain current on property taxes, required insurance coverage, the costs of home maintenance and any HOA fees. These materials are not from, and have not been approved by, HUD, FHA or any government agency. Subject to credit approval.
Sean Skaggs | Reverse Mortgage Area Sales Manager | NMLS #859600
Mutual of Omaha Mortgage, Inc. | NMLS #1025894 | Equal Housing Lender