Reverse Mortgages
A reverse mortgage is a cash loan based on your home’s equity. People apply for this type of loan to help pay for medical treatment, finance home improvements, buy long-term care insurance, or supplement their income. For many seniors, a reverse mortgage is their saving grace. Reverse mortgages allow older adults to convert their home’s equity into cash while retaining their home ownership.
Who qualifies for a reverse mortgage?
An individual who is 62 and older and who owns their home (or has a very low outstanding mortgage balance that can be paid off at the loan closing) can qualify. The home must be their “principal residence,” meaning they live in it 6 months or more out of a year. To apply for a reverse mortgage they must either have:
- A single-family property.
- A 2-4 unit building.
- A federally approved condominium or planned unit development.
- A manufactured home if it is built on a permanent foundation, classed, and taxed as real estate, and meets other requirements. Mobile homes are not eligible.
There are many factors that affect the amount that can be borrowed with a reverse mortgage:
- Age of borrower(s): As owner’s age increases, the amount they can borrow increases.
- Value of the home: As the home equity increases, the amount they can borrow increases.
- Type of reverse mortgage.
- Current reverse mortgage interest rates: Lower interest rate usually means more can be borrowed.
Remember, the loan amount is never 100% of the home value or lending limit. The loan amount is a calculation based upon the age of the youngest borrower and the expected interest rate.
How is a reverse mortgage paid back?
Typically, after the last surviving owner/borrower passes away, heirs pay reverse mortgage loans (plus interest) by selling the home, or using other funds. Sometimes heirs take a new “forward” mortgage against the home. A “forward mortgage” is a traditional mortgage consumers use to buy a home. A reverse mortgage may also be paid back after the surviving owner or borrower permanently moves away. The word “permanently” move away means the owner/borrower has not lived in the home for 12 months in a row.