Discover the Benefits of a Reverse Mortgage Line of Credit

Relax, reminisce, and relish retirement. A reverse mortgage could be your ticket!

Reverse mortgages have become more attractive as a result of low mortgage rates, which have given homeowners the ability to access more of their home’s equity, even if its value hasn’t considerably gone up. In a reverse mortgage, this ultimately makes more money available to the homeowner, who could use the funds in retirement for healthcare, home repairs and more.

The big question for millions of seniors is: Is it worth using this tappable equity, or do the risks outweigh the benefits. Here we’ll examine the pros and cons. But first, let's answer the question. What is a reverse mortgage?

What is a Reverse Mortgage?

A reverse mortgage is a form of cash-out refinancing that allows property owners 62 and older to convert real estate equity into spendable cash. Virtually all reverse mortgages are insured through the Federal Housing Administration, (FHA), which means if the debt is not repaid by the borrower, it will be repaid with FHA reserves. The government calls reverse mortgages “HECMs,” short for Home Equity Conversion Mortgages, and borrowers must pay insurance premiums to participate. These premiums are used to fund the FHA’s reserves.

An elderly couple is dancing together in front of a window.

How Do Reverse Mortgages Work?

Reverse mortgages are very different from traditional mortgages. With a traditional mortgage, if you borrow $100,000 at 3.4 percent fixed-rate interest for 30 years, you’ll have a $443.48 monthly payment (principal and interest). However, if you borrow $100,000 with a reverse mortgage, your required monthly payments for principal and interest are zero.

Pros and Cons of Reverse Mortgages

Every form of financing has its pros and cons. With a reverse mortgage, here are some of the key issues to consider.

Pros of a reverse mortgage:

Boosts Cash Flow:

Post-retirement, many seniors face a drop in income. With ample home equity, they can refinance and even extract cash with a reverse mortgage.

Stay Put, Age in Place:

Most adults, especially those aged 50 and older, desire to age in their own homes. A reverse mortgage can make this dream a reality, saving the costs of relocating.

Potential Cost Efficiency:

While there are expenses associated with reverse mortgages, they may prove to be less than the costs of moving.

Tax-Free Money:

The IRS deems reverse mortgage payments as loan proceeds, not income, making them non-taxable.

No Claim Against Heirs:

Lenders have no claims against other assets or heirs if the reverse mortgage debt surpasses the property's market value.

You Still Own Your Home:

Reverse mortgages end when borrowers move, sell, or pass away. Heirs can decide how to manage the property and the debt thereafter.

Reverse Mortgage Pros

Boosts cash – Many seniors experience a significant income reduction when they retire. Monthly mortgage payments are the biggest expense for many. A senior with sufficient home equity, however, can refinance, pay off an existing regular mortgage, and even pull cash from the property with a reverse mortgage.

You don’t have to move – According to AARP, “between 50 and 60 percent of adults age 18-49 say they want to remain in their communities and homes as they age, while nearly 80 percent of adults age 50 and older indicate this same desire.” Rather than move, a reverse mortgage may allow seniors to age in place and be near friends and family. Also, because there are costs associated with selling, moving and resettling, the result is less equity because of the expenses involved.
Costs may be lower – There is a cost to reverse mortgages, but it may be cheaper to get a reverse mortgage than to move. You can get a good sense of reverse mortgage expenses by using the National Reverse Mortgage Lenders Association calculator. Alternatively, to move means expenses to sell the home, move household goods and either buy a replacement residence or rent in a new location.

The money you get from a reverse mortgage is not taxable – According to the IRS, “reverse mortgage payments are considered loan proceeds and not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.” At the same time, the IRS adds that reverse mortgage interest “isn’t deductible until you actually pay it (usually when you pay off the loan in full). Tax rules, as usual, can be complicated so be sure to see a tax professional for advice.

No claim against heirs – Because a reverse mortgage balance will grow in size, it’s possible that reverse mortgage debt can exceed the fair market value of the property over time. However, the responsibility to repay the debt can never exceed the property’s value. That’s because a reverse mortgage is an example of “non-recourse” financing. The result is that lenders have no claims against other assets or heirs.

You continue to own the home – Reverse mortgages can be paid off by borrowers but typically end when individuals move, sell or pass away. In an estate situation, heirs have several choices: First, they can sell the property to repay the debt and keep any equity above the loan balance. Second, they can keep the home and refinance the reverse mortgage balance if the property’s value is sufficient. Third, if the debt exceeds the value of the property, heirs can settle the loan by giving the title back to the lender. The lender can then file a claim for any unpaid balance with the insurer, almost always the FHA.

Cons of a reverse mortgage:

It's Not Free:

Reverse mortgages come with lender fees, FHA insurance charges, and closing costs.

Interest Rates Variances:

HECMs offer both fixed-rate and adjustable-rate options, each with its pros and cons.

Potential Program Violations:

Acquiring a reverse mortgage may breach asset restrictions for Medicaid and SSI.

Foreclosure is Possible:

Seniors can face foreclosure if they neglect property taxes, insurance, or HOA bills.

Complexities Around Status Changes:

Issues may arise if a borrower moves to a care facility or if they marry post-obtaining a reverse mortgage.

Reverse Mortgage Cons

Reverse financing is not free – Reverse mortgages have costs that include lender fees, FHA insurance charges and closing costs. These costs can be added to the loan balance; however, that means the borrower has more debt and less equity. The NRMLA calculator illustrates the costs reverse mortgage borrowers can face.

Interest rates – HECMs are structured so that both adjustable-rate and fixed-rate financing options are available. If you want fixed-rate financing, the amount of equity you can access will be smaller than a reverse mortgage with adjustable-rate interest. The NRMLA calculator shows both fixed-rate and adjustable-rate options.
Program violations – A reverse mortgage may cause borrowers to violate asset restrictions for the Medicaid and Supplemental Security Income (SSI) programs. This is complicated stuff, so be sure to speak with an attorney who specializes in elder law or a legal clinic before searching for a reverse mortgage program. If fees are a concern, see if pro-bono legal help is available in your community.

Your home can be foreclosed – Since reverse mortgages do not have required monthly payments for principal and interest, it might seem as though foreclosure is impossible. Not so. Seniors can have their homes foreclosed if they do not pay property taxes, maintain property insurance, fail to pay HOA bills, etc.

Status changes – Reverse mortgages get complicated. If the borrower goes to a long-term care facility, are they still considered a resident in the home? If a borrower marries after obtaining a reverse mortgage, must a spouse move out of the property if the borrower dies? For details regarding these and other questions, it’s best to speak with a lender or an attorney who specialize in elder law or contact a legal clinic.
Why reverse mortgages may be more useful today
Two market trends may cause seniors to re-examine their reverse mortgage options.

First, in the past decade, home equity has grown enormously as home values have risen. Equity is generally defined as the value of a home less outstanding mortgage balances. While not all homeowners have benefited from rising values, millions have:

As of the first quarter of 2020, the Federal Reserve estimates that American homeowners have about $19.6 trillion in real estate equity.
Much of the equity is held by seniors. A recent estimate from the NRMLA is that seniors have $7.54 trillion in real estate wealth.
Second, mortgage rates have fallen through the floor. According to Bankrate, the national average rate for fixed-rate 30-year financing was 3.24 percent as of August 13.

How is this possible?

With our model $100,000 mortgage, the borrower pays $443.48 each month. Of this amount, $160.15 is paid toward principal in the first month to reduce the loan balance. The rest of the payment — $283.33 — is interest, or what the lender charges you for loaning you money.

In the second month, the balance has been reduced to $99,839.85. The monthly payment is still $443.48, but now the interest cost has been reduced to $282.88 while the principal payment has grown to $160.60. The payment plan continues like this, with more of the payment going to the principal and less to interest over time, until the loan term is up.

With a reverse mortgage the process is, well, reversed. Instead of making a $443.48 payment each month, the borrower pays nothing. This does not mean the loan is free, however. Instead, the interest cost — $282.8 — is added to the mortgage balance. In the second month, the balance grows to $100,282.88. Since the loan balance is now a little bigger, the interest cost is a touch higher, and this process continues until the time comes for the loan to be repaid.

The reverse mortgage calculator shows how much you can receive

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Reverse mortgage calculator results are an estimate and not an offer to lend. Calculations are based on available programs offered this week and subject to change. These materials are not from HUD or FHA and were not approved by HUD or a government agency.

HUD's Evolution of HECM Standards: A Look at the Changes

Why the Change?

HUD's HECM standards underwent several modifications over recent years. The driving force behind this was the significant program losses amounting to billions.

2013: Addressing Immediate Losses

To curtail these losses, HUD, in 2013, set limitations:Capped the sum HECM borrowers could derive from a property.
Restricted the cash amount borrowers could extract from a HECM in its initial year.

2014: The Introduction of 'Residual Income' Requirement

Mirroring the successful VA refinance program, HUD integrated a 'residual income' criterion.
This ensures that post major expenses, borrowers retain enough funds to cover monthly living expenses, which encompasses property taxes and insurance.

2017: A Two-Pronged Approach

Financing Reduction: HUD decreased the amount reverse borrowers could finance. As per AARP, under this new rule, "a 62-year-old borrower with a 5% interest rate would draw 11% less money from their home" compared to previous regulations.
Premium Cost Alterations: Initial premiums saw a surge, but annual premiums in the ensuing years were reduced.

2018: The Dual Appraisal Mandate

HUD, in 2018, mandated two appraisals for properties deemed high-risk.
The objective? Ensure properties possess adequate value to reimburse a reverse mortgage in foreclosure scenarios. The approved loan amount would reflect the lower of the two appraisal values.

2019: Strengthening Financial Assessment Standards

HUD further tightened the reins by bolstering financial assessment criteria.
Lenders now scrutinize tax returns, bank statements, and related data to confirm borrowers' ability to manage ongoing housing expenses.
In case of assessment shortfalls, lenders allocate HECM funds, safeguarding tax and insurance payments.

Impact on Reverse Mortgages:

There was a noticeable decline in the reverse mortgages insured by the FHA. From 60,091 in 2013, the figure plummeted to 31,274 by 2019.

Tackling Reserve Mortgage Losses:

HUD has achieved commendable strides in slashing reserve mortgage deficits. From a staggering $13.63 billion in 2018, the prospective loss shrunk to $5.92 billion by 2019. With ongoing trends and a steady housing market, 2020 might witness a complete eradication of these losses.

Should You Get a Reverse Mortgage?

Reverse mortgages are complex — they work for some homeowners but not for all. You need to consider your finances and preferences, as well as your estate plans and tax implications, to see if a HECM is right for you.