Reverse Mortgage Basics
What is a reverse mortgage?
A reverse mortgage can help homeowners aged 62+ convert a portion of their home equity into liquidity. It does not require the homeowner to sell their home, give up title or take on a monthly mortgage payment*. The loan balance plus any accrued interest does not have to be repaid to the lender until the borrower no longer occupies the property as their primary residence (when they move out, sell the home or pass away).
- The home must be debt free before the homeowner can qualify.
This is not the case - the existing loan balance will be paid off with the reverse mortgage loan proceeds.
- The bank owns the home.
This is not the case - borrower keeps the title to the home and the property is used as the collateral for the loan.
- The heirs incur any outstanding mortgage debt.
This is not the case - when the loan is due and payable, the loan balance is paid off from the proceeds of the home sale, or the heirs may refinance the loan in their name and keep the property.
- Reverse mortgage loan is a non-recourse loan - the only collateral for the loan is the property itself
- Non-borrowing spouse is protected in case the borrower no longer occupies the property
- The loan qualification includes a financial assessment to ensure the borrower is able to cover the property taxes, home insurance and maintenance
Borrower Eligibility and Obligations
- The borrower must be 62 or older, US citizen or a lawful permanent resident
- The borrower must occupy the property as their primary residence
- The borrower must receive home counseling
- The borrower must maintain property obligations, such as property taxes, home insurance, homeowner association dues and home maintenance
- Eligible properties include new or existing 1-4 family homes and FHA approved condominiums and manufactured homes
- Ineligible properties include second homes (vacation homes), investment properties (including Bed and Breakfast), mixed used properties with 49%+ commercial use, and cooperatives
Reverse Mortgage Products
- Fixed interest rate mortgage - interest rate is locked at closing. Loan proceeds are disbursed in one lump sum.
- Adjustable rate mortgage (ARM) - interest rate adjusts, with maximum caps to offer protection against rise in interest rates. Payment options are flexible, the borrower may access their funds by receiving a lump sum, term payments, tenured payments, a line of credit, or a combination.
Flexible Payment Option (Adjustable Rate Mortgage Products)
- Line of Credit - borrower withdraws funds as needed until until funds are depleted
- Tenure - borrower receives monthly payments for the lifetime of the loan
- Term - borrower receives monthly payments for a set period
- Lump Sum - borrower receives up to 60% of the available funds in the first year, the balance is released in year two
- Combination of the above options
Comparison with Traditional Mortgage
|Monthly Mortgage Payment
|Receipt of Funds
lump sum**, term or tenured payments,
line of credit, or a combo
Home Equity Loan or
Home Equity Line of Credit
terminated by a maturity event
(sale of home, moving out, pass away)
|Loan Balance Exceeds Home Value
Borrower is responsible for the full loan balance |
* The borrower must meet all loan obligations, including living in the property as the principal residence and paying all property charges, including property taxes, home and flood insurance and homeowners association dues, as applicable. The borrower must maintain the home. If the borrower does not meet these obligations, then the loan will need to be repaid.
** This is the only option available for a fixed rate product.