A reverse mortgage loan is similar to a traditional mortgage — these are loans made to a homeowner using the home as collateral.
In a traditional mortgage, the homeowner pays down the debt over time usually on a monthly basis with a mortgage payment. But with a reverse mortgage, the loan balance grows over time because the homeowner is not making monthly mortgage payments.
A reverse mortgage usually doesn’t need to be repaid until the homeowner has passed away or has moved. As a result, life expectancy plays a huge role in determining how much money a borrower can receive from a reverse mortgage. Typically, the older you are, and the more equity you have in your home — the more money you can expect from a reverse mortgage.
How a Reverse Mortgage Loan Works
John and Jane are a retired couple, aged 75 and 72 (must be older than 62 years of age to qualify), who want to stay in their home, but need additional income for their living expenses. They also need some cash to pay for home repairs.
After speaking with a reverse mortgage lender to discuss their options, they decide to go with a reverse mortgage that will allow them to withdraw $10,000 upfront and also provide them with a monthly payment for as long as they live in the house.
John and Jane meet with an FHA appraiser, who determines that their home’s value is $300,000. They currently owe $35,000 on their mortgage. After paying off their existing mortgage and taking out a lump sum of $10,000, John and Anne will continue to receive $703.00 every month for as long as they live in the house.
Reverse Mortgage Distribution Options
Reverse mortgages offer multiple payout options, such as:
- Lump Sum – You will receive your entire loan proceeds upfront, with a fixed interest rate
- Term – Equal monthly payments for a fixed period of months
- Tenure – Equal monthly payments for as long as you live in the home
- Line of Credit– A line of credit that you may draw upon at any time and in any amount of your choosing until the line of credit is exhausted.
You can also choose a combination of different payment options, such as the example of John and Anne. In that scenario, they chose a combination of tenure payments with an additional $10,000 line of credit for home repairs.
How Much Can I Get from a Reverse Mortgage Loan?
How much you get from a reverse mortgage loan is dependent on a combination of factors:
- Age of the youngest borrower or eligible non-borrowing spouse
- Current interest rate; and
- Lesser of appraised value or the HECM FHA mortgage limit of $636,150
Reverse Mortgage Requirements
To be eligible for a reverse mortgage, you must meet the following requirements:
- The youngest borrower must be 62 years of age or older
- Have a considerable amount of equity in the home (usually at least 50%)
- Live in the home as your primary residence
- Be able to maintain the property and continue paying property taxes, homeowners insurance, and any homeowner’s association fees.
- Complete a HUD-approved reverse mortgage counseling session.