What Is a Reverse Mortgage and How Does It Work?

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With the average monthly Social Security check being only $1,781, many seniors find it tough to make ends meet in the face of rising inflation. 

Reverse mortgages make it possible for older homeowners to continue living in their homes while borrowing money based on their home’s value. Here’s a simple guide to what a reverse mortgage is, how it works, and what you need to qualify.

What is a reverse mortgage?

A reverse mortgage is a financial option that allows homeowners aged 62 or older to transform a portion of their home’s equity into tax-free income while maintaining ownership of their property.

Unlike a traditional mortgage, a reverse mortgage doesn’t require borrowers to make monthly payments. Instead, the lender pays the homeowner in the form of a lump sum, regular installments, or a line of credit.

One of the most popular types of reverse mortgages is the Home Equity Conversion Mortgage (HECM).

home equity conversion mortgages (HECMs) explained

A Home Equity Conversion Mortgage (HECM) is the Federal Housing Administration’s (FHA) reverse mortgage program. This government-insured loan allows senior homeowners to access the equity in their homes for purposes like home maintenance, repairs, or general living expenses. HECM borrowers can continue living in their homes as long as they stay current on property taxes and homeowner’s insurance.

To qualify, the borrower must meet several criteria, including:

  • Be aged 62 or older.
  • Own the property outright or have a small mortgage balance.
  • Occupy the property as their primary residence.
  • Not be delinquent on any federal debts.
  • Attend a consumer information session given by an approved HECM counselor.

If you’re interested in getting a HECM, you’ll need to use a U.S. Department of Housing (HUD)-approved lender. Loan Pronto works with HUD-approved lenders that offer HECMs.

How does a reverse mortgage work?

Since the homeowner isn’t required to make regular loan payments, the loan balance becomes due when the borrower passes away, moves out permanently, or sells the home.

In such cases, it’s the responsibility of the homeowner’s heirs to either settle the loan or sell the property to repay the lender. The money from the home’s sale is used to cover the reverse mortgage’s principal, interest, mortgage insurance, and fees. Any surplus proceeds beyond the borrowed amount go to the homeowner if they’re still alive or to their estate.

It’s worth noting that reverse mortgage proceeds are tax-free. This means it won’t impact the homeowner’s Social Security or Medicare benefits because the government sees reverse mortgage payments as loan proceeds, not income.

The bottom line on reverse mortgages

A reverse mortgage is a valuable option for older homeowners looking to increase their retirement income by tapping into their home’s equity. It can provide essential financial support during retirement, helping cover expenses such as medical bills, in-home care, or home improvements.

But these loans aren’t right for everyone, and they can be a little tricky. If you qualify and are thinking about a reverse mortgage, make sure you understand how it works and what it means for you and your family before getting one.

Use our free mortgage and amortization calculators to determine your monthly payment, including mortgage insurance, taxes, interest, and more.

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