Reverse Mortgage Smart

There are several factors that impact how much you can qualify for when you get a reverse mortgage.

The main factors are the age of the borrower (or youngest borrower if there is more than one), the interest rate of the reverse mortgage, and the appraised value of the home.

Generally speaking, the older you are, the lower the interest rate, and the higher the appraised value of the home, the larger a reverse mortgage a homeowner will qualify for.

The location of your property can also affect the amount you are eligible to borrow. HECM reverse mortgages have maximum amounts set by the government.

There are a few mortgage calculators online that may give you some idea of the amount you will be able to borrow.

The AARP reverse mortgage calculator can be found here.

A reverse mortgage calculator provided by the National Reverse Mortgage Lenders Association can be found here.

Bank of America offers reverse mortgages. Their reverse mortgage calculator is here.

A Home Equity Conversion Mortgage (HECM) is a reverse mortgage made by a lender or bank, insured by the Federal Housing Administration (FHA). Approximately 90% of reverse mortgages made are HECM reverse mortgages.

HECM reverse mortgages can be used by borrowers at least 62 years of age to convert the equity in their home into monthly payments or a line of credit.

To obtain a HECM reverse mortgage, a homeowner must first attend a counseling session provided by an approved counselor. This session will provide info on reverse mortgages, particularly with regard to a borrower’s financial and legal obligations. A list of HUD-approved HECM counselors can be found here.

Please visit our FAQ page for additional information on HECM reverse mortgages.

There are several pros and cons to a reverse mortgage.

Reverse Mortgage Pros:

The borrower is not required to make any monthly payments.

There is a variety of methods for the homeowner to receive funds from the lender. These include a lump sum cash payment, monthly payments for a fixed period of time, monthly payments until the homeowner dies, or a line of credit.

The borrower will never owe more than the home is worth. When the home is sold, the lender will pay you or your estate the amount the sales price exceeds the balance on the reverse mortgage. If the funds from the sale are not sufficient to cover the balance, the lender is forced to absorb the difference.

A reverse mortgage is relatively easy to qualify for, relative to a conventional mortgage. There are no credit, income, or medical qualifications that a borrower is required to meet. The requirements are that you be 62 years of age or older, own and have equity in your property, occupy the property as a primary residence, and attend a counseling session by an approved counselor (which will provide you with reverse mortgage information, mainly with regards to your financial and legal obligations).

Reverse Mortgage Cons:

A major con of reverse mortgages is the high closing costs. Closing costs for reverse mortgages can be twice those for conventional mortgages.

A reverse mortgage can also impact Medicaid eligibility. If you rely on Medicaid, you should consult a trusted professional for information on the requirements you would have to satisfy in order to maintain your Medicaid eligibility.

A reverse mortgage gives you cash, up front or over time, but this cash comes from the equity in your home. As you receive more cash (and interest accrues on the amount you have borrowed), the balance on your reverse mortgage rises. This reduces the equity in your home. When the home is eventually sold or refinanced, the balance must be paid off.

For additional reverse mortgage information, please visit our FAQ page and consult the other articles on this site.

A homeowner must be at least 62 years of age to obtain a reverse mortgage. If more than one person is on the title (such as two spouses), both must be at least 62 years of age to qualify.

There are no income, medical, or credit requirements for a borrower to receive a reverse mortgage.

Reverse mortgages can be obtained on single family homes, 1-4 unit homes with one unit occupied by the borrower, condos, townhouses, and manufactured homes.

A reverse mortgage must be in the first lien position, meaning that all other mortgages on the residence must be paid off prior to closing or with funds received from the new reverse mortgage.

A homeowner must receive third party counseling from a source approved by the Department of Housing and Urban Development (HUD) prior to obtaining a reverse mortgage. This generally consists of a 45 minute counseling session, explaining the borrower’s legal and financial obligations. Approved counseling agencies can be found here.

A reverse mortgage is designed to allow seniors to draw on the equity in their homes, converting their home equity into cash.

With a regular conventional mortgage, you make payments to the lender. With a reverse mortgage, the lender makes payments to you.

There are three different options for receiving your cash. A homeowner can receive a lump sum, monthly payments from the mortgage company, or a line of credit that can be drawn on at the homeowner’s option. If the monthly payments option is chosen, the homeowner can choose to receive payments for a fixed period of time (a “term” payment plan) or as long as one borrower lives and continues to occupy the property as a principal residence (a “tenure” payment plan).

Additionally, payment plans can be combined. For example, a borrower could choose to combine a line of credit with a term payment plan or with a tenure payment plan.

The funds from a reverse mortgage can be used for any purpose the homeowner desires, but all other mortgages on the home must be paid off first.

Interest accrues on the mortgage balance, which increases as each payment is made to the homeowner or when a draw is made on a line of credit. The reverse mortgage continues until the borrower sells the home, dies, or ceases to use the home as a primary residence. No payments are made by the homeowner until the mortgage terminates and the house is sold (or refinanced by the homeowner or the homeowner’s heirs/estate).

The amount you owe on a reverse mortgage can never exceed the value of your home. This means that when the home is sold, neither you nor your estate would be required to make up any difference if the house sells for less than the amount owed on the mortgage. Additionally, if the house sells for more than the mortgage balance, you or your estate will receive the excess funds.

What is a HECM Reverse Mortgage?

HECM stands for Home Equity Conversion Mortgage. A HECM reverse mortgage is a reverse mortgage made by a lender or bank, insured by the Federal Housing Administration (FHA).