How reverse mortgages work and when to be careful

Most reverse mortgages are home equity conversion mortgages (HECMs), and they’re insured by the FHA. Currently, the most home value an HECM can count toward your loan is $1,249,125.

How does a reverse mortgage work?

With a regular mortgage, you make payments to the lender and your loan balance goes down. With a reverse mortgage, it works the other way. The lender pays you, and your loan balance goes up as interest and fees are added.

You can get the money in several ways:

• A lump sum
• Monthly payments
• A line of credit you can draw from as needed
• A combination of these

How much you can get depends on your age, your home's value, current interest rates, and how much you still owe on your home. Older borrowers and homes with more equity qualify for more.

Who qualifies for a reverse mortgage?

For an HECM, usually:

• At least one borrower has to be 62 or older.
• The home has to be your main residence.
• You have to own the home outright or have significant equity. (Note: any existing mortgage is paid off with reverse mortgage money before you get a single payment).
• You have to complete counseling with a HUD-approved counselor.
• The lender will review your finances to make sure you can keep up with taxes, insurance, and the cost of maintenance.

What does it cost?

Reverse mortgages are expensive to set up. Costs usually include:

• An upfront mortgage insurance premium of 2% of your home's value, up to the loan limit
• An annual mortgage insurance premium of 0.5% of your loan balance
• Origination fees, which are capped
• Closing costs, like an appraisal and title insurance (the same ones you’d see with a conventional mortgage0
• Interest, which adds to your balance every month

Most costs can be paid out of the loan itself, but that means less money for you and a bigger balance.

What happens when the loan comes due?

You don't make monthly payments, but the loan does have to be repaid. That happens when:

• The last borrower dies
• You sell the home
• You move out for more than 12 months in a row (like moving into a nursing home)
• You fail to pay property taxes or insurance
• You let the home fall into serious disrepair

What happens to your heirs?

When the loan comes due, your heirs can sell the home and keep anything left after the loan is repaid. They can also pay off the loan and keep the home. If the home is worth less than the loan balance, they'll never owe more than the home is worth. They can generally pay off the loan for 95% of the home's appraised value.

Risks to watch for

• Losing your home over taxes and insurance is the most common risk for reverse mortgage borrowers. Make sure you can afford these costs for years to come.
• If your spouse is younger than 62 and not a borrower, make sure they're listed as an eligible non-borrowing spouse. That can let them stay in the home after you die, under certain conditions.
• The loan grows over time, which reduces the equity and what your heirs inherit.
• Reverse mortgage money doesn't count as income, but money left sitting in your bank account could affect whether you’re eligible for SSI or Medicaid.
• Be wary of anyone who pushes you to use the money to buy an annuity, an investment, or home repairs they're selling.

Alternatives to consider

• Downsizing to a smaller, less expensive home
• Property tax relief programs for older homeowners
• A home equity loan or line of credit, if you can afford payments
• State and local home repair grants for older adults