Reverse Mortgage: What It Is, How Seniors Use It

After retirement, without regular income, you may sometimes struggle with finances. If you’re a homeowner, a reverse mortgage is one option that may help you manage your financial challenges.

A reverse mortgage is a home loan that allows homeowners 62 and older to withdraw some of their home equity and convert it into cash. You don’t have to pay taxes on the proceeds or make monthly mortgage payments.

You can use reverse mortgage proceeds however you like. They’re often earmarked for expenses such as:

• Debt consolidation

• Living expenses

• Home improvements

• Helping children with college

• Buying another home that might better meet your needs as you age

A reverse mortgage is the opposite of a traditional home loan; instead of paying a lender a monthly payment each month, the lender pays you. You still have to pay property taxes, homeowners insurance and other related costs, or you could risk foreclosure.

The sum you receive in a reverse mortgage is based on a sliding scale of life expectancy. The older you are, the more home equity you can pull out.

The Federal Housing Administration insures two reverse mortgage types: adjustable-rate and a fixed-rate.

1. Fixed-rate reverse mortgages consist of a one-time lump sum payment.

2. Adjustables have five payment options:

• Tenure: Set monthly payments so long as you or your eligible spouse remain in the home

• Term: Set monthly payments for a fixed period

• Line of credit: Unspecified payments when you need them, until you’ve exhausted your funds

• Modified tenure: A line of credit and set monthly payments for as long as you or your eligible spouse live in the home

• Modified term: A line of credit and set monthly payments for a fixed period of your choosing

• You’re 62 or older

• You and/or an eligible spouse — who must be named as such on the loan even if he or she is not a co-borrower — live in the home as your primary residence

• You have no delinquent federal debts

• You own your home outright or have a considerable amount of equity in it

• You attend the mandatory counseling session with a home equity conversion mortgages (HECM) counselor approved by the Department of Housing and Urban Development

• Your home meets all FHA property standards and flood requirements

• You continue paying all property taxes, homeowners insurance and other household maintenance fees as long as you live in the home

Before issuing a reverse mortgage, a lender will check your credit history, verify your monthly income versus your monthly financial obligations and order an appraisal on your home.

The Consumer Financial Protection Bureau recommends waiting until you’re older to obtain a reverse mortgage so you don’t run out of money too early into retirement.

Nearly all reverse mortgages are issued as home equity conversion mortgages (HECMs), which are insured by the Federal Housing Administration. HECMs come with stringent borrowing guidelines and a loan limit.