Reverse mortgages are one possible source seniors and their families may consider to generate funds for in-home care, assisted living, or other important health needs. This increasingly popular loan option turns a borrower’s home equity into a lump sum of money or consistent monthly payments.
While proceeds from selling your home is a common way people pay for long-term care facilities, a reverse mortgage “may be helpful in circumstances where one or both parties are going to remain in the home,” says Michelle Ash, a Jacksonville, Florida-based certified financial planner and chartered adviser in senior living.
Designed to help retirees stay in their home longer, these loans are only available to people age 62 and older. “They’re a way to help seniors age in place at home or have extra funds for needed expenses,” says Ellen Skaggs, a Tustin, California-based certified reverse mortgage specialist.
Learn more about the pros and cons of reverse mortgages, as well as how to qualify, potential fees, and whether this financial tool may be a beneficial way to pay for long-term care.
A reverse mortgage is a loan that’s borrowed from your home’s equity. Home equity is the difference between the appraised value of your home and what you owe on any mortgage.
You don’t have to pay the loan while you live in the home — it’s not due until the last borrower dies or moves from the home for one full year. Typically, the home is then sold and the proceeds go to repay the home equity amount borrowed plus interest. Any money remaining goes to the homeowner or the beneficiary.
One of the most common misconceptions about reverse mortgages is that you’re selling your house to the bank, says Skaggs. In fact, reverse mortgage borrowers maintain the title and ownership of their homes for the entirety of the loan. As long as you maintain the home and pay property taxes, you cannot be forced to move or repay the loan.
There are three kinds of reverse mortgages:
To qualify for a HECM, you must:
Additionally, the home must be in good condition and meet U.S. Department of Housing and Urban Development (HUD) requirements. Also, you cannot have an HECM in combination with another home loan.
Eligible properties for reverse mortgages include:
The amount of the reverse mortgage loan depends on a few key factors:
Age plays a big part in determining how much money a person can receive. Older borrowers typically receive more money. (The FHA has a current lending limit of $765,600 for HECMs.)
With a reverse mortgage, interest is added to the loan balance each month, and the balance grows. Borrowers receive less than the value of the home because of the interest charges. “A reverse mortgage generally doesn’t exceed 80 to 85 percent of the value of the home, but is largely based on the borrower’s age at the time of the loan,” Ash says.
This reverse mortgage calculator provides a free estimate of the amount of money you may receive based on your age, ZIP code, and home value.
The funds from an HECM are first used to pay back any loans against the house. After that, the money can be used however the homeowner chooses.
For example, reverse mortgages can be used to pay for long-term care expenses such as:
A reverse mortgage allows you to receive funds in three different ways, says Skaggs. You can choose to receive:
You may be able to use a combination of payout options, depending on the loan. With a line of credit and monthly payments, the amount of money available to you grows over time. Unlike a lump sum or monthly payments, a line of credit doesn’t accrue interest unless you withdraw or use the money.
To become eligible, a person must demonstrate to the lender they’re able to pay property taxes, homeowner’s insurance, and other related costs listed in the loan agreement.
“Qualifying for a reverse mortgage is not as stringent or precise as a traditional mortgage,” says Rick Rodriguez, a certified reverse mortgage specialist in Las Vegas. “It’s not based on a minimum FICO, or credit score. It’s based on payment history, and how responsible the applicant has been in regard to making payments over the last 24 months.”
Income is taken into account. However, many seniors are eligible based on their Social Security income, Rodriguez says.
HECMs are typically more expensive than other types of home loans, according to the Consumer Financial Protection Bureau (CFPB).
Upfront and ongoing costs include:
Keep in mind that costs increase with larger loan balances and the longer you keep your loan.
While the benefits of a reverse mortgage range, some pros include:
Reverse mortgages have some limitations and costs to note, including:
Maybe. Reverse mortgages have become a sought-after option as the pandemic has impacted many seniors’ retirement savings, says Jennifer Fraser, director of stakeholder engagement at GreenPath Financial Wellness, a HUD-approved nonprofit financial counseling group. “Reasons for obtaining a reverse mortgage still vary. Education is key. It’s important to review all financial options to determine which is best for the borrower’s specific situation and finances. One opportunity doesn’t always fit all.”
Because deciding whether a reverse mortgage is right for you can be complex, HUD requires everyone to meet with an independent financial counselor before applying for a HECM.
“Some borrowers fail to grasp that a reverse mortgage is an option to age in place. They must maintain the home as their primary residence and maintain communication with the lender and complete all requests, so they don’t inadvertently default,” says Fraser.
A reverse mortgage maymake sense to help pay for long-term care if:
“A reverse mortgage may not be for everyone,” says Skaggs. “But it is for a lot of people who are living on fixed incomes.”
A reverse mortgage maynotmake sense to help pay for long-term care if:
Experts recommend gaining professional advice about long-term care and payment options before deciding on a reverse mortgage or other financial solution.
Consumer Financial Protection Bureau. “Reverse mortgage loans.”
Federal Trade Commission. “Reverse mortgages.”
National Council on Aging. “Use Your Home to Stay at Home.”