Reverse.org

What is a reverse mortgage?

A reverse mortgage is a loan against your home that requires no repayment for as long as you live there. It is offered by the FHA (Federal Housing Administration) to homeowners ages 62 or older. It is different from other types of loans because the borrower does not make payments during the loan.

According to the AARP’s 2006 survey, reverse mortgages are most often used to pay for medical and daily living expenses. Homeowners who have an existing mortgage also use the reverse mortgage to fully pay off the existing mortgage and stop making monthly payments.

How it works

A reverse mortgage, like a traditional mortgage, is a loan made by a lender (usually a bank) to a homeowner using the home as security or collateral.

In a traditional mortgage, the bank will lend up to 90% of the property’s value to the homeowner and expects that the homeowner will use their income to pay down the debt over time. With a reverse mortgage, the bank loans less (usually 60%) and expects that the reverse mortgage balance will grow over time because the homeowner is not making payments.

Pros and cons

The two most important benefits of a reverse mortgage:

• Provides monthly or lump sum income
• Homeowner stays in the home without making monthly payments

The two most important downsides of a reverse mortgage:

• Fees are higher than a traditional mortgage
• Value of estate inheritance decreases

Who is eligible?

To qualify for a reverse mortgage, the youngest homeowner must at least 62 years old and have enough home equity (typically at least 40%).

Eligibility assessments use an FHA calculation that considers:

• Age of the homeowner
• Property’s value
• Balance on existing mortgages
• Expected interest rate