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How Reverse Mortgage Works

Reverse mortgages eliminate monthly house payments and provide cash drawn against home equity. While reverse mortgages can help increase cash flow, it's important to know how reverse mortgages work. Here's what you need to know.

Why It's Called a Reverse Mortgage

Unlike traditional mortgages, reverse mortgages require no payments as long as you, a co-borrower or an eligible non-borrowing spouse occupies the reverse mortgaged home. The difference between traditional "forward" mortgages and reverse mortgages is that while reverse mortgages require no monthly payments, the amount owed increases as interest on payouts and other allowable charges accrue. The amount owed on a traditional mortgage typically decreases after each payment.

Borrower Eligibility Requirements

Homeowners must meet the following requirements in order to be eligible for a reverse mortgage. Meeting eligibility requirements does not guarantee loan approval.

  • You must be 62 years of age.
  • Your home must be mortgage-free or you owe very little on an existing mortgage
  • You must occupy your home as your principal residence more than half of each calendar year
  • You must show that you can pay for ongoing property charges such as property taxes and assessments, hazard insurance, HOA dues and flood insurance if required.
  • You may not be delinquent on any federal debt.
  • You must attend a HECM information session provided by a HUD-approved counseling agency (If your reverse mortgage is insured by FHA).

Payout Options for Reverse Mortgages

The maximum amount available for withdrawal is calculated based on the age of the youngest borrower or non-borrowing spouse, current mortgage rates, and the lesser of your home's appraised value, the FHA loan limit of $625,000 or the purchase price of your home. The cost of your initial FHA mortgage insurance premium is also a factor; if you withdraw up to 60 percent of available funds in the first year, your FHA mortgage insurance premium is calculated at 0.50 percent of your mortgage amount. If you withdraw more than 60 percent of your available funds within the first year, your initial FHA mortgage insurance premium is calculated at 2.50 percent of your reverse

mortgage amount. Keep this in mind when selecting your payout option.

The FHA is a federal agency that insures lenders against losses on most reverse mortgages. FHA advises that you can elect to receive payouts in several ways:

There are several options for taking payouts from reverse mortgages.

  • Lump sum: Lenders may allow borrowers to withdraw all available home equity at loan closing.
  • Scheduled periodic payments: Homeowners can elect to receive periodic payouts from their available home equity for a specified time or until all borrowers have left the mortgaged home.
  • Line of credit: Homeowners are granted a line of credit to draw against as needed up to their available home equity amount.
  • Line of credit/lump sum payout: Borrowers may elect to receive part of their reverse mortgage proceeds as a lump sum payout and establish a credit line for the balance of available funds.

Maximum withdrawal amounts are calculated based on the age of the youngest borrower or eligible non-borrowing spouse, mortgage rates and the amount of the initial mortgage insurance premium.

Reverse mortgages are designed to help senior homeowners stay in their homes. Mortgage lenders and FHA have strict occupancy requirements for homes financed with reverse mortgages.

Occupancy Requirements and Termination of Reverse Mortgages

Borrowers are required to occupy their reversed mortgaged homes as their primary residence. According to

, you must live in your home for "a majority of the calendar year." This requirement allows homeowners flexibility to be away from home for extended periods, but also requires homeowners to maintain their reverse mortgaged home as a primary residence; it may not be used for investment purposes.

Reverse mortgages become due and payable when the last borrower or eligible non-borrowing spouse has left the mortgaged home. Reverse mortgages are typically paid off through refinancing or sale of the mortgaged home.

Finally, if you have heirs, it's essential to understand how a reverse mortgage can impact your estate. Please contact an estate attorney or financial advisor for more information specific to your circumstances.

Find out how much you qualify for.

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