A reverse mortgage is a specialized type of loan designed for homeowners aged 62 and older. It allows them to convert a portion of the equity they’ve accumulated in their home into tax-free cash. Unlike a traditional mortgage where you make monthly payments to the lender, with a reverse mortgage, the lender pays you, and no monthly mortgage payments are required as long as the borrower continues to live in the home as their primary residence. The loan, including accrued interest and fees, becomes due and payable when the borrower no longer lives in the home (e.g., they sell the house, move out permanently, or pass away).
The predominant product in the reverse mortgage market is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA) in the United States.
Homeownership and Reverse Mortgage Trends
In 2022, a significant majority (over 79%) of older Americans were homeowners, with a median home equity of $250,000 for those aged 65+. Since 1990, more than 1.3 million older homeowners have utilized HECM loans to access their home equity.
While reverse mortgages gained popularity, reaching a peak of over 119,000 borrowers in 2009, their popularity has seen a decline. In the first half of 2024, 19,894 older homeowners initiated a HECM.
A Snapshot of Reverse Mortgage Borrowers (FY2023)
- Demographics: Single women represented the largest group of HECM borrowers. The majority of borrowers were white (66.2%), followed by Black (6.6%) and Hispanic (4.8%) homeowners.
- Average Age: The average age for taking out a reverse mortgage has remained relatively stable, at just under 75 years old.
- Usage: Reverse mortgages are generally not used for discretionary spending like vacations. Instead, most borrowers use the funds for immediate and pressing financial needs, such as paying off existing mortgages or other debts. Many also use these loans to supplement their monthly income, enabling them to continue living in their own homes for longer.
Types of Reverse Mortgage Payments
Reverse mortgages, like other home loans, involve costs such as origination fees, servicing fees, and third-party closing charges (e.g., appraisal, title search, recording costs). Most of these costs can be financed as part of the reverse mortgage loan itself.
Borrowers have several options for receiving reverse mortgage payments:
- Lump Sum: A single, upfront payment received at the loan closing. This is the only payment option that offers a fixed interest rate.
- Term: The loan value is disbursed in equal monthly payments over a fixed period chosen by the borrower.
- Tenure: Similar to the term payment, but payments are disbursed in equal monthly amounts for as long as the borrower lives in the home as their primary residence.
- Line of Credit: Functions much like a home equity line of credit (HELOC), allowing borrowers to draw any amount of money at any time until the credit line is exhausted. The unused portion of the line of credit grows over time.
The vast majority of HECM borrowers (nearly 95%) opt for a line of credit when taking a reverse mortgage.
Considerations for Taking Out a Reverse Mortgage
Experts emphasize that reverse mortgages are most effective when integrated into a comprehensive financial plan, rather than being used as a last resort in a financial crisis. Older homeowners considering a reverse mortgage are advised to explore all available options before committing to a loan, including:
- Utilizing a Home Equity Line of Credit (HELOC)
- Refinancing a current mortgage
- Downsizing to a smaller home
- Lowering overall expenses
It’s crucial to remember that reverse mortgage borrowers remain responsible for ongoing property-related expenses. They must continue to pay property taxes, homeowner’s insurance costs, and any condo/homeowners’ association fees in a timely manner. Failure to do so can lead to default on the loan and potentially foreclosure on their home.
Federal law mandates that all individuals considering a HECM reverse mortgage receive counseling from a HUD-approved counseling agency. This counseling aims to ensure borrowers fully understand the terms, costs, and implications of the loan, as well as alternative financial solutions. Both telephone-based counseling (available nationwide) and face-to-face counseling (available in many communities) are offered.