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What is a Reverse Mortgage

Taliah Karim November 16, 2021
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As a homeowner you may have heard of a reverse mortgage, but what exactly is it, and is this something that can benefit you? According to Forbes, A reverse mortgage is a type of loan used by homeowners who have considerable equity in their homes. Borrowers can convert a portion of their home equity into cash. This is a popular option for borrowers of retirement age who need to get access to cash to pay for cost-of-living expenses late in life, often after the homeowners run out of other savings or sources of income. Using a reverse mortgage, homeowners can get the cash they need during retirement at rates starting at less than 3.5% per year.
This article discusses Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage. There is more than one type of reverse mortgage, for more detailed information see the article on money.com
In addition to the above, there are many reasons why a qualified borrower would apply for a reverse mortgage, including consolidating debt, increased flexibility in managing finances paying for healthcare-related costs, and more. To be eligible, the primary homeowner must be 62 or older. Additional eligibility requirements include:
  • You must own the property outright or have at least paid a substantial amount of your mortgage.
  • The property must be occupied as your primary residence.
  • You cannot be delinquent on any federal debt.
  • You must have the financial capability to continue to make payments on property taxes, homeowners insurance, and homeowners association dues.
  • You must participate in an information session provided by a U.S. Department of Housing and Urban Development (HUD)-approved reverse mortgage counselor.
Now that we have covered eligibility, let’s dive into how a reverse mortgage works. The United States Federal Trade Commission defines a reverse mortgage as follows: Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate will repay the loan.
While this can be an attractive opportunity, be aware there are a few costs associated with a reverse mortgage, including:
  • Mortgage insurance premiums (MIP), –typically 2 percent initial MIP at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. The MIP can be financed into the loan.
  • Origination fee – To process your HECM loan, lenders charge the greater of $2,500 or 2 percent of the first $200,000 of your home’s value, plus 1 percent of the amount over $200,000. The fee is capped at $6,000.
  • Servicing fees – Lenders can charge a monthly fee to maintain and monitor your HECM for the life of the loan. Monthly servicing fees cannot exceed $30 for loans with a fixed rate or an annually adjusting rate, or $35 if the rate adjusts monthly.
  • Third-party fees – Third parties may charge their fees, as well, such as for the appraisal and home inspection, a credit check, title search, and title insurance, or a recording fee.
To summarize, A reverse mortgage is a type of loan that allows homeowners to borrow part of their home’s equity as tax-free income. So what are the pros and cons of applying for a reverse mortgage?


  • Access a large amount of cash or a steady source of income in retirement.
  • Flexibility in how you receive the money. Options include a lump sum upfront, an annuity, a line of credit, or a combination of the three.
  • HECMs are non-recourse loans, so you will only owe what you borrowed even if your house loses value.
  • You do not pay income tax on money you receive from a reverse mortgage.
  • You have the right to change your mind for any reason and cancel the reverse mortgage within three business days of closing on the loan.


  • If you have an existing mortgage, funds obtained from a reverse mortgage must be used to pay it off.
  • You must pay mortgage insurance premiums and homeowners insurance for the life of the loan on federally backed loans.
  • Other expenses associated with reverse mortgages, like fees and closing costs, will reduce the amount of cash you get.
  • If you and your co-borrowing spouse die before paying back the loan, your heirs must pay off the full loan balance or 95% of the home’s appraised value (whichever is less) if they wish to keep the house from foreclosure.
  • Falling behind on property taxes or insurance payments could trigger default and foreclosure.

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