Understanding Reverse Mortgages: Eligibility, Costs, and Options

Reverse Mortgage Eligibility Requirements (HECM)

Home Equity Conversion Mortgages (HECMs) are the most common type of reverse mortgage, insured by the Federal Housing Administration (FHA). To qualify for a HECM reverse mortgage, borrowers must meet several key requirements:

• Be at least 62 years old (all borrowers on title must meet this age requirement)

• Own the property outright or have a low mortgage balance that can be paid off with proceeds from the reverse mortgage

• Occupy the property as their primary residence

• Not be delinquent on any federal debt

• Have the financial resources to continue paying property taxes, homeowners insurance, and home maintenance

• Participate in a HUD-approved counseling session that explains the program’s costs, financial implications, and alternatives

Additionally, the property must be a single-family home, a 2-4 unit dwelling with one unit occupied by the borrower, an FHA-approved condominium, or a manufactured home that meets FHA requirements. The amount a borrower can receive depends on age, current interest rates, and the home’s appraised value.

Reverse Mortgage Costs: MIP, Origination Fees, and More

Reverse mortgages come with several costs that borrowers should understand before proceeding:

Mortgage Insurance Premium (MIP): This FHA insurance protects both lenders and borrowers. It includes an upfront premium of 2% of the home’s appraised value (capped at FHA lending limits) and an annual MIP of 0.5% of the outstanding loan balance.

Origination Fees: Lenders charge origination fees to process the reverse mortgage. These fees are calculated based on the home’s value: $2,500 for homes valued at $125,000 or less; 2% of the first $200,000 of the home’s value plus 1% of the value above $200,000 for homes valued over $125,000. The maximum origination fee is capped at $6,000.

Servicing Fees: Lenders may charge monthly servicing fees throughout the life of the loan, typically between $30-$35 per month.

Third-Party Closing Costs: These include appraisal fees, title search and insurance, surveys, inspections, recording fees, mortgage taxes, and credit checks.

Interest: Reverse mortgages typically have variable interest rates tied to a financial index, although fixed-rate options are available for lump-sum disbursements.

Prices, rates, or cost estimates mentioned in this article are based on the latest available information but may change over time. Independent research is advised before making financial decisions.

Line of Credit vs Lump Sum Reverse Mortgage

Reverse mortgages offer different disbursement options, with the two most common being the line of credit and lump sum:

Line of Credit Option:

• Provides flexibility to draw funds as needed

• Unused portion grows over time at the same rate as the loan’s interest rate

• Can help extend the life of available funds

• Ideal for those who don’t need all the money upfront

• Typically offered with adjustable interest rates

• Can be combined with monthly payments for consistent income

Lump Sum Option:

• Delivers entire available amount at closing

• Usually comes with a fixed interest rate

• Best for those with immediate large expenses (medical bills, home repairs)

• No growth potential for unused funds

• May result in spending through available equity too quickly

• Subject to initial disbursement limits in the first year (typically 60% of the approved amount)

The choice between these options depends on individual financial needs, planning horizons, and how the funds will be used. A line of credit offers flexibility and growth potential, while a lump sum provides certainty with a fixed rate and immediate access to funds.

Reverse Mortgage Impact on Heirs and Estate Planning

Reverse mortgages can significantly impact estate planning and inheritance considerations:

Loan Repayment: When the last borrower dies, moves out permanently, or sells the home, the reverse mortgage becomes due. Heirs have several options:

• Pay off the loan and keep the house (can use personal funds or refinance)

• Sell the house to repay the loan (keeping any equity remaining after loan repayment)

• Deed the house to the lender through a deed in lieu of foreclosure

• Allow foreclosure (though this is typically the least desirable option)

Non-Recourse Protection: Reverse mortgages are “non-recourse” loans, meaning heirs will never owe more than the home’s value at the time of repayment, even if the loan balance exceeds the home’s value.

Reduced Inheritance: Since a reverse mortgage depletes home equity, heirs will inherit less from the property than they would if there were no reverse mortgage.

Timeline Considerations: Heirs typically have 30 days to decide how to handle the property after the borrower’s death, with up to 12 months to arrange financing or sell the property if they’re actively working on repayment.

Estate planning professionals often recommend clear communication between borrowers and potential heirs about the reverse mortgage and its implications. Some families establish alternate inheritance plans or use life insurance to offset the reduced home equity that heirs will receive.

Making an Informed Decision About Reverse Mortgages

Given the significant financial implications, potential borrowers should carefully weigh the benefits and drawbacks of reverse mortgages:

Benefits include accessing home equity without selling, no monthly mortgage payments, and funds that can be used for any purpose. Drawbacks include accumulating interest and fees, potential impact on eligibility for means-tested benefits like Medicaid, and reduced inheritance for heirs.

Before proceeding with a reverse mortgage, consider consulting with a financial advisor who specializes in retirement planning, discussing plans with family members who might be affected, and exploring alternatives like downsizing, home equity lines of credit, or other financial products.

The mandatory HUD counseling session provides valuable information, but seeking independent financial advice tailored to your specific situation can help ensure a reverse mortgage aligns with your long-term financial goals and estate planning wishes.