How Does Reverse Mortgage Work For Seniors?

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    Seniors who want to maintain ownership of their properties may find difficulty in homeownership as they age because they may have fewer sources of income. At the same time, they may have several other expenses, such as property taxes, homeowners insurance, and different types of insurance for seniors.

    Reverse mortgage for seniors could be a reasonable solution for senior homeowners who need additional funds when they hit the age of 62. You may be wondering what a reverse mortgage for seniors is, how reverse mortgage for seniors works, and what the pros and cons of reverse mortgage for seniors are. Allow us to walk you through all these points.

    What Is a Reverse Mortgage? 

    A reverse mortgage is a type of loan that homeowners aged 62 and above can apply for. To qualify for a reverse mortgage loan, you need to have a sufficient amount of home equity. This loan allows you to borrow against your home’s value. 

    You do not have to make loan payments and can instead receive the money as a line of credit, lump sum, or a fixed monthly payment. When the borrower passes away, the balance of the loan will have to be paid off. The same rule applies if you choose to sell your home and move.

    Federal laws also require interested borrowers to seek professional help or financial counseling approved by the Department of Housing and Urban Development (HUD). These individuals can help explain to you if reverse mortgages apply to your situation and give you an idea of your other options. 

    The Benefits of Reverse Mortgages  

    For a quick and basic overview of reverse mortgages, here are some of the top benefits:

    • You can choose how you want to be paid: through a line of credit, lump sum, monthly payment, or a combination of these options.
    • You can continue aging in place in the home you are comfortable in for as long as you meet the requirements of paying for insurance, property taxes, and general home maintenance.
    • Your heirs will have several choices when you pass, from keeping your home then refinancing the reverse mortgage’s balance to returning the title to the lender and selling your property to retain the equity from the loan’s balance and repay any debt.
    • You do not have to pay taxes on the income you receive from this since the Internal Revenue Service (IRS) labels this as loan proceeds or a loan advance.
    • You will still be protected in the event that your loan’s balance surpasses the value of your home due to non-recourse financing.

    As you can see, the benefits of a reverse mortgage are aplenty. Seeking the advice of a financial counselor will further clarify if all these boxes can be ticked off for you.

    What Are the Types of Reverse Mortgages? 

    There are three types of reverse mortgages, with each one of them addressing a range of different needs. 

    • Home-Equity Conversion Mortgages (HECM): A HECM is the most common type of reverse mortgage because it can be used for any purpose and does not mandate any medical or income requirements. These are insured on a federal level, and you will need to seek counseling prior to applying for it. It may be more expensive as well.
    • Single-Purpose Reverse Mortgages: Single-purpose reverse mortgages are available from non-profit agencies and the government. These lenders may only allow you to use funds for approved means. This type of reverse mortgage is the cheapest option, but it may also be the least common and most difficult to get as it is not available in all states.
    • Proprietary Reverse Mortgages: This type of reverse mortgage is offered by private lenders. This type of reverse mortgage is ideal for borrowers whose homes have higher value, as they will be able to get a larger loan advance. You can likely borrow a bigger amount because these do not have monthly premiums and upfront costs.

    What to Look For in a Reverse Mortgage

    To help you choose a reverse mortgage, you should consider a few factors. You can use these as parameters when looking at options and lenders so that you remain as objective as possible.

    • Interest Rates: Interest rates differ for every lender, and there are two types available: fixed-rate reverse mortgage and adjustable-rate reverse mortgage. The rate is lower for the latter option and can change up to 10% more than what it was initially. Fixed-rate interests cannot be changed once you sign on for the reverse mortgage.
    • Distribution Options: As mentioned previously, distribution options are one of the great things about reverse mortgages. When you opt for an adjustable-rate reverse mortgage, you can get the money through any of the three distribution options (line of credit, lump sum, monthly payment). When you go for a fixed rate, your only option may be to receive it as a lump sum.
    • Total Cost: When assessing the total cost of your reverse mortgage, you will have to take into account the breakdown of costs. Fixed-rate reverse mortgages may have lower or no origination fees compared to adjustable-rate programs. The same may also apply for monthly service charges, usually between $25-35, which are lower for fixed-rate programs. Total costs change very frequently, so be sure to monitor this beforehand.

    Best Reverse Mortgage Providers for Seniors

    Here are three of the best reverse mortgage providers for seniors to simplify your decision-making process.

    • Finance of America Reverse: Finance of America Reverse offers reverse mortgages in 43 states. They are a member of the National Reverse Mortgage Lenders Association (NRMLA) and were the fourth-biggest lender of HECM reverse mortgages in 2021.
    • American Advisors Group (AAG): The AAG was the biggest provider of reverse mortgages in 2021. They are certified by the NRMLA for their high ethical standards and have a 97% customer satisfaction score. 
    • All Reverse Mortgage, Inc.: All Reverse Mortgage, Inc. has been in the industry for seventeen years and has been a finalist at the BBB Torch Ethics Award with a rating of A+. 

    How Do You Qualify for a Reverse Mortgage?

    When you are deciding if a reverse mortgage is meant for you, here are a few things to keep in mind to see if you qualify:

    • The property you are using for your reverse mortgage needs to be your primary residence. 
    • You need to be at least 62 years old to qualify for a reverse mortgage, and loan amounts may also increase as you grow older.
    • Your home has to be a single-family home, a HUD-approved condominium, FHA-approved manufactured home, townhouse, or a two to four-unit home where you reside in at least one unit.
    • You need to have a minimum of 50% equity on your home or own it outright in order to qualify for a reverse mortgage.
    • You need to demonstrate your ability to meet the loan requirements, and meeting with a HUD-approved reverse mortgage counselor can help you determine if this is true.

    A reverse mortgage may not be for everyone, but it is a great way of using your home equity as a means of gaining additional income. You can also have more flexibility with your finances, thanks to its variety of repayment options. Even if you meet these qualifications, you need to get the go-signal or approval from a counselor and lender.

    Frequently Asked Questions 

    Since a reverse mortgage is one of the more uncommon types of loans, here are some frequently asked questions to help you understand them better. 

    What is the downside of a reverse mortgage?

    The downsides of a reverse mortgage include limitations when changing your status due to housing options, costs (FHA insurance, closing costs, lender fees), potential foreclosure if you fail to pay for property taxes, less inheritance for your heirs, and conflict in qualifying for other types of retirement benefits.

    Is reverse mortgage a good idea for seniors? 

    Reverse mortgage is a good idea for seniors who know for sure that they can meet the requirements and expenses of maintaining and insuring their home. It is also a good idea if you intend on aging in place or living in your home for a longer period of time. 

    Who is not eligible for a reverse mortgage?

    You will not be eligible for a reverse mortgage if you are under 62 years old, do not use your home as a primary residence, fail to seek counseling from a reverse mortgage professional who is HUD-approved, have less than 50% home equity, and do not live in the type of property approved by the HECM for reverse mortgages. 

    What are the three types of reverse mortgages?

    The three types of reverse mortgages are home-equity conversion mortgages (HECMs), single-purpose reverse mortgages, and proprietary reverse mortgages. 

    Can a family member take over a reverse mortgage?

    Your family members can inherit your house if you have a reverse mortgage when you die. They will have to pay off the balance of your debt together with any other costs that have been accrued. 

    A reverse mortgage is an interesting route to take if you are a senior with enough home equity who needs an additional source of income. Check out some of our other guides to senior housing to help you compare what your options are as you age. Contact Senior Strong for all your other senior housing needs as well!

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