How Does a Reverse Mortgage Work?
A reverse mortgage is a loan for older American homeowners that uses the home’s equity as collateral. The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance. Any remaining equity is inherited by the estate.
The estate is not personally liable if the home sells for less than the balance of the reverse mortgage. This is often seen as a positive benefit for those concerned about leaving debt behind.
Eligibility For a Reverse Mortgage
To be eligible for a reverse mortgage, the Federal Housing Administration (FHA) requires that all homeowners be at least age 62. The home must be owned free and clear or all existing liens must be satisfied with proceeds from the reverse mortgage.
If there is an existing mortgage balance, it can be paid off completely with the proceeds of the reverse mortgage loan at closing. Generally there are no credit score requirements for a reverse mortgage.
Outliving the Reverse Mortgage
Generally speaking, a reverse mortgage loan cannot be outlived and will not become due, as long as at least one homeowner lives in the home as their primary residence, continues to pay required property taxes and homeowners insurance and maintains the home in accordance with FHA requirements.
The amount that is available generally depends on four factors: age (older is better), current interest rate, appraised value of the home and government imposed lending limits. Use the calculator to estimate how much you could be eligible for.
Distribution of Money From a Reverse Mortgage
There are several ways to receive the proceeds from a reverse mortgage.
- Lump sum – a lump sum of cash at closing.
- Tenure – equal monthly payments as long as the homeowner lives in the home.
- Term – equal monthly payments for a fixed number of years.
- Line of Credit – draw any amount at any time until the line of credit is exhausted.
- Any combination of those listed above