Reverse mortgages: how they work, what they cost and who they suit
A reverse mortgage is a loan against your home that you do not repay month by month. Instead, the loan balance grows, and it is repaid when you sell the home, move out permanently or die. Most reverse mortgages in the US are Home Equity Conversion Mortgages (HECMs), insured by the FHA.
Who qualifies for a HECM
According to HUD, you must:
- be at least 62
- own the home outright or have paid down a considerable amount of the mortgage
- live in it as your principal residence
- not be delinquent on any federal debt
- have enough income to keep paying property taxes, insurance and HOA fees
- complete a counseling session with a HUD-approved HECM counselor
How you can take the money
As a lump sum, a monthly payment for a set term or for as long as you live in the home, a line of credit, or a combination.
What it costs
HUD lists the main charges:
- an upfront mortgage insurance premium of 2% at closing
- an annual mortgage insurance premium of 0.5% of the outstanding balance
- an origination fee, capped at $6,000
- a monthly servicing fee and third-party closing costs
Most costs can be paid from the loan, which reduces the money you receive.
The risks
- The balance goes up, not down. The CFPB stresses that interest and fees are added each month.
- You can still lose the home if you stop paying property taxes or insurance or let the property fall into disrepair.
- Heirs must repay the loan, usually by selling the home, to keep it. Ask how this works before you sign.
- A non-borrowing spouse has limited protections. Make sure both spouses understand their position.
Alternatives
Downsizing, a HELOC or home equity loan, local property tax relief programs for seniors, or help from family. The CFPB recommends exploring alternatives before committing.