How Reverse Mortgages Work
A Reverse Mortgage (most commonly the FHA-insured Home Equity Conversion Mortgage or HECM) is designed to help seniors tap into the wealth they've built up in their homes.
In a traditional mortgage, you pay the lender every month, and your loan balance decreases. In a reverse mortgage, the lender pays you, and your loan balance increases over time as interest is added to the balance. You do not have to make any monthly principal or interest payments as long as you live in the home.
Who Qualifies for a Reverse Mortgage?
To qualify for an FHA HECM, you must meet the following criteria:
- You must be at least 62 years old. (If you are married, the age of the youngest spouse determines your loan limit).
- You must own the home outright or have a low enough mortgage balance that it can be completely paid off by the proceeds of the reverse mortgage.
- You must live in the home as your primary residence.
- You must continue to pay your property taxes, homeowners insurance, and HOA fees.
- You must attend a counseling session with a HUD-approved agency.
How Much Money Can You Get?
You cannot borrow 100% of your home's value. The amount you can borrow is called the Principal Limit, and it depends on three main factors:
- Age: The older you are, the more money you can borrow.
- Interest Rates: Lower interest rates increase your borrowing limit.
- Home Value: Up to the FHA maximum claim amount (which adjusts annually).
Generally, borrowers receive between 40% to 60% of their home's appraised value. From this Principal Limit, your existing mortgage must be paid off first, and closing costs are deducted. The remainder is your "Net Available Cash."
How Do You Receive the Money?
You have several options for receiving the proceeds:
- Lump Sum: Receive all available cash at once (subject to first-year withdrawal limits).
- Line of Credit: Leave the money in an account to draw from as needed. Interestingly, the unused portion of a HECM line of credit grows over time.
- Term Payments: Fixed monthly payments for a specific number of years.
- Tenure Payments: Fixed monthly payments guaranteed for as long as you live in the home.