Retirement is a well-deserved break after a lifetime of work, but it can also stretch your finances. You might need between 70% to 90% of your former income to live comfortably in retirement — but that’s not always possible.
If you’re struggling to figure out how to make ends meet after retiring, you might consider a reverse mortgage. This is a special type of loan designed for seniors that can give you a much-needed financial cushion.
How does a reverse mortgage work?
With a traditional mortgage, you borrow a sum of money to buy a home and then pay back the loan with monthly mortgage payments — a reverse mortgage is the opposite.
Typically, you take out a reverse mortgage on a home you own. Then, the reverse mortgage lender pays you — either with monthly payments, a lump sum, or through a line of credit.
The amount you receive is based on your age, the interest rate you qualify for, and the worth of your home. That’s because a reverse mortgage borrows against the equity in your property or the difference between what it’s worth and any remaining mortgage you owe.
How do you pay back a reverse mortgage?
Typically, a reverse mortgage doesn’t need to be paid back until you move out of the home or pass away. At that point, you or your heirs will pay back the amount borrowed as well as interest and fees accumulated over time. These can include closing costs, origination fees, mortgage insurance premiums, and servicing fees.
Unlike a traditional mortgage, you don’t make small monthly payments to repay a reverse mortgage. Instead, repayment needs to be made all at once. Here are a few of the more common ways a reverse mortgage is paid back.
Selling
The most common way a reverse mortgage is paid back is through selling the home. When the home is sold, you use the proceeds from the sale to pay back the loan.
Here are the scenarios you’ll encounter, depending on the value of your home at the time of the sale:
- If the value of the home is greater than the loan balance: You or your heirs keep the difference.
- If the value of the home is less than the loan balance: You or your heirs will use the sale proceeds to pay back part of the loan and mortgage insurance will pay the difference. You’ll never have to pay back more than 95% of the appraised value of the home.
Refinancing
You may be able to avoid selling your home by refinancing your reverse mortgage. If you have enough equity in the home and enough income to make mortgage payments, you may qualify to refinance back into a traditional mortgage. This is a good option to consider if you or your heirs wish to keep the home.
Tip
You can also choose to refinance into a new reverse mortgage, which may be beneficial if interest rates have fallen or if the value of your home has increased significantly.
Deed in lieu of foreclosure
If you’re not able to sell or refinance the home, you may be able to satisfy the reverse mortgage through a process known as “deed in lieu of foreclosure.” This involves turning over ownership of the home to the lender, avoiding foreclosure proceedings.
You may consider this option if your home’s value has dropped significantly and is now far less than the reverse mortgage loan balance.
Paying off the loan with cash
If you or your heirs have enough savings, you may be able to pay off the reverse mortgage loan balance with cash. The most you'll need to pay is 95% of the home’s value. A reverse mortgage can typically be paid back at any time.
When do you have to pay back a reverse mortgage?
Generally, reverse mortgage borrowers don’t need to pay back the reverse mortgage as long as they live in the home. Payment typically comes due whenever the homeowner:
- Passes away
- Sells their home
- Leaves the home to live somewhere else (such as an assisted living facility)
If you borrowed the reverse mortgage along with your spouse, they will be able to stay in the home without repaying the reverse mortgage if you pass away or move out. Your spouse may be able to stay in the home even without being a co-borrower if you were married at the time of the reverse mortgage, qualifying as an eligible non-borrowing spouse.
There are a few other situations in which a borrower may need to pay back a reverse mortgage or otherwise risk losing the home. For example, you may default on your reverse mortgage if you fail to pay your property taxes or homeowner’s insurance or if you don’t keep up with home repairs. But your mortgage servicer will make sure you are aware of the terms of your loan.
Types of reverse mortgages
There are three types of reverse mortgages:
- Home Equity Conversion Mortgage (HECM)
- Proprietary reverse mortgage
- Single-purpose reverse mortgage
The most common type of reverse mortgage is the Home Equity Conversion Mortgage or HECM. These loans are insured by the Federal Housing Administration (FHA) and can be used for any purpose.
You may also find proprietary reverse mortgages offered by private lenders, which are most common for people with very high home values.
Finally, there are single-purpose reverse mortgages. These reverse mortgages are sponsored by state or local governments or nonprofits. They can only be used for a specific purpose like home repair or paying property taxes.
Learn More: Types of Reverse Mortgages
How to qualify for a reverse mortgage
To qualify for a reverse mortgage, you usually must meet strict criteria. In most cases, eligibility includes:
- You must be age 62 or older
- You must live in the home full-time, as your primary residence
- You must own your home free and clear or have only a small remaining mortgage
- You must be up to date on all federal debt, including income taxes and student loans
- You must have enough money to keep the home in good repair and pay property taxes and insurance. You may use a portion of the reverse mortgage to keep this promise.
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