How Does a Reverse Mortgage Work?
The FHA's Home Equity Conversion Mortgage (HECM) reverse mortgage program is designed for homeowners age 62 and up who are presently living in their home and have either paid off their mortgage or a significant portion of it. This reverse mortgage loan program makes it possible to withdraw existing equity from a home in several ways. Homeowners may receive the funds as a set monthly rate, a line of credit, a lump sum, or a combination of these options.
In addition, borrowers can purchase a primary residence with reverse mortgage funds. This option is only available, however, if the buyer is able to use cash on hand to make up the difference between proceeds from the reverse mortgage and the closing costs of the purchased property plus the sale price.
Is a Reverse Mortgage Right For Me?
Many factors determine whether a reverse mortgage loan is a good fit for you. First, schedule a meeting with an HECM reverse mortgage counselor where you will review important information including reverse mortgage eligibility, financial implications and alternative options. Other topics, such as what to do when the loan becomes due and payable, will also be discussed.
After attending your reverse mortgage counseling session, you will have all of the necessary information to make an educated, independent decision about whether a reverse mortgage is right for you. To find a reverse mortgage counselor, call (800) 569-4287 or search online for a professional HECM counselor.
Check the reverse mortgage eligibility guidelines to find out if you qualify for a reverse mortgage.
Choose one of five reverse mortgage payment options:
Monthly payments of a fixed amount, as long as at least one borrower continues to live in the home as a principal residence.
Fixed rate payments for a designated number of months.
Line of Credit The borrower selects either installments or unscheduled payments at times and in amounts of the borrower’s choosing as until the credit line has been exhausted.
Modified Tenure As long as the borrower continues to occupy the home, a combined line of credit and monthly payments are delivered at a designated time.
Modified TermThe borrower chooses a period of months during which the borrower will receive a combined line of credit and fixed monthly payments.
Need to change a payment option? Expect to pay a fee of $20.
How Much is a Reverse Mortgage Worth?
Several factors determine how much a homeowner can borrow through a reverse mortgage, including:
- Age of youngest borrower
- Current interest rate
- Whichever is less; the appraised value or the sales price or the existing HECM FHA reverse mortgage limit of 625,000
- Initial Mortgage Insurance Premium –Choose between the HECM Standard or Saver.
When choosing a reverse mortgage program, the HECM Standard option allows you to borrow more. Although less money is available through the HECM Saver, this secondary option offers lower upfront fees.
Additionally, more money is available to borrow if interest rates are lower, you are older, and your house is more valuable. To estimate cash benefits generated by reverse mortgage, use the online calculator located on the top right of this page.
How Much Does a Reverse Mortgage Cost?
The proceeds of the loan can be used to cover most of the costs of a reverse mortgage. Choosing to finance the loan this way allows the borrower to avoid paying these upfront costs out-of-pocket. However, this option also decreases the amount of money available to the borrower from the loan.
An initial Mortgage Insurance Premium will be levied when the loan is closed, either 2% (HECM Standard) or .01% (HECM Saver) of the appraised value of the home, the sales price or the $625,000 limit set by the FHA HECM reverse mortgage program. Throughout the span of the loan, the borrower will also be charged a Mortgage Insurance Premium that is equal to 1.25% of the mortgage balance.
Fees and other charges associated with reverse mortgage loans:
Mortgage Insurance Premium
You must purchase FHA mortgage insurance. Mortgage insurance guarantees delivery of expected loan advances. However, the mortgage insurance premium (MIP) can be financed through your loan.
Third Party Charges
Third party charges associated with the cost of closing include credit checks, an appraisal, mortgage taxes, title search and insurance, recording fees, surveys and inspections.
An origination fee compensates the lender who processes your reverse mortgage loan. For homes appraised at less than $125,000 origination fees may not exceed $2,500. For homes appraised at more than $125,000, lenders may charge 1% of the value of the home, as well as 2% of the home’s value for properties worth up to $200,000.
Borrowers may select either a fixed or adjustable interest rate. An adjustable interest rate means the rate may change depending on the market indexes. Lenders are prohibited from altering annually adjusted HECM reverse mortgage loans by more than 2 percent per year and no more than 5 percentage points overall during the lifespan of the loan. Interest rates on monthly adjusted reverse mortgages are not restricted by the FHA. Much more common than adjustable-rates, however, are fixed-rate reverse mortgages, in which the interest rate remains constant over the entire duration of the loan.
For HECM reverse mortgages, lenders and their agents act as servicers. Their responsibilities include sending out account statements, disbursing loan proceeds and ensuring that the borrower continues to meet loan requirements, including the payment of hazard insurance premiums and real estate taxes. A servicing fee may not exceed $35 and will be deducted from the borrower’s available funds during loan origination. This fee is then added to the loan balance each month.
Note: Your lender will advise you which charges are mandatory and which are opt-out.