Homeowners age 62 and older: learn how to turn accumulated home equity into a flexible, tax-free growing line of credit without the burden of mandatory monthly mortgage payment offers. A reverse mortgage can allow older homeowners to access part of the equity built up in a home without making traditional monthly mortgage payments.
A reverse mortgage allows an eligible homeowner to borrow against the equity in a primary residence.
Unlike a traditional mortgage, the homeowner generally does not make required monthly mortgage payments on the loan balance. Instead, interest and fees are added to the loan balance.
The loan generally becomes due when the borrower dies, sells the home, or no longer lives in the home as a principal residence. Certain other circumstances can also cause the loan to become due.
The homeowner keeps title to the property, provided the requirements of the reverse mortgage are met.
The HECM is the most common reverse mortgage program in the United States and is insured by the Federal Housing Administration.
HECM eligibility generally includes:
The amount that can be borrowed depends on factors including the borrower's age, the interest rate, and the home's value, subject to applicable HECM limits.
Reverse mortgage offers can differ even when the underlying type of loan is similar.
Important differences can include:
The Consumer Financial Protection Bureau recommends comparing loan options, fees, and interest rates from several lenders.
Comparing multiple offers can make it easier to see how much money would actually be available and how the loan balance could change over time.
A Good Faith Estimate, or GFE, provides important information about the terms and estimated costs of a reverse mortgage.
The CFPB explains that the GFE can help consumers compare offers and understand the expected cost of a reverse mortgage. Consumers can obtain multiple GFEs before choosing a lender.
When reviewing a GFE, pay attention to:
Looking at the complete estimate is more informative than comparing a single advertised rate.
Reverse mortgage interest rates can be structured differently.
A fixed-rate structure generally keeps the interest rate unchanged according to the terms of the loan.
HECM fixed-rate loans commonly use a single-disbursement structure, although the precise terms should be reviewed in the loan documents.
An adjustable-rate reverse mortgage can change according to the applicable interest-rate index and contractual terms.
Adjustable-rate HECMs can provide greater flexibility in accessing proceeds through structures such as a line of credit or monthly payments.
The interest-rate structure should be considered alongside the payout method and expected length of the loan.
HECM borrowers can generally choose among several ways to receive funds.
A line of credit allows the borrower to draw funds as needed rather than receiving the entire amount immediately.
Interest and certain fees generally apply to amounts borrowed rather than unused credit.
A reverse mortgage can provide monthly proceeds.
Depending on the structure, payments can be arranged for a specified period or for as long as the borrower meets the loan requirements.
A borrower can receive available proceeds in a single disbursement under applicable loan terms.
Because interest and fees can begin accumulating on funds that are borrowed, the cost structure differs from a line of credit.
The CFPB notes that the amount available and costs can differ depending on the selected payment method.