Reverse mortgages
A discussion guide
Consumer Financial
Protection Bureau
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About this discussion guide
This guide gives an overview of many key concepts of reverse
mortgages. A qualied reverse mortgage counselor can help you
learn more.
If you’re interested in considering a reverse mortgage, but haven’t spoken
with a counselor yet, call (800) 569-4287 to nd a U.S. Department of Housing
and Urban Development (HUD), hud.gov approved reverse mortgage
counselor today.
A detailed discussion with a counselor will give you important information
to help you decide whether a reverse mortgage is right for you. HUD-
approved reverse mortgage counselors have the latest information on reverse
mortgages. In order to get the most out of your counseling session, come
prepared to talk about:
§ Your nancial needs and goals
§ Your spouse or partner’s future housing and nancial needs
§ Other family members or dependents living with you and their future
housing needs
§ The reasons you’re considering a reverse mortgage
§ The alternatives to a reverse mortgage you may have considered
Alert
Most reverse mortgages today are called Home Equity Conversion
Mortgages (HECMs). HECMs are federally insured by the Federal
Housing Administration (FHA). This guide covers typical features
and requirements for HECM reverse mortgages. Non-HECM reverse
mortgages may have different requirements and features.
REVERSE MORTGAGES: A DISCUSSION GUIDE2
How is a reverse mortgage different from
a traditional mortgage?
Traditional mortgages
With a traditional mortgage, you usually borrow money to pay for the home at
the time of the purchase, and pay it back over time. With each payment, you
build your equity and your loan balance goes down.
Equity
Debt
Home price Loan and
down
payment
Plus monthly
payment
Plus monthly
payment
Increases
equity
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Reverse mortgages
With a reverse mortgage, you borrow money using your home as a guarantee
for the loan, as you would for a traditional mortgage. Unlike a traditional
mortgage, a reverse mortgage is repaid when the borrowers no longer live
in the home. Although you won’t make monthly mortgage payments, you’ll
need to continue to pay property taxes and homeowners insurance, and keep
your house in good condition. Because interest and fees are added to the loan
balance each month, your loan balance goes up—not down—over time. As your
loan balance increases, your home equity decreases.
Reverse mortgage borrowers must be age 62 or older. Borrowers usually use
the loan to help pay for living expenses.
Home equity Reverse
mortgage
loan
Monthly
interest and
fees
Monthly
interest and
fees
Increases debt
Equity
Debt
Alert
A reverse mortgage is not free money. It is a loan that you, or your heirs,
will eventually have to pay back, usually by selling your home.
Borrowed money + interest + fees each month = rising loan balance.
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How does a reverse mortgage work if I still have a
traditional mortgage?
Many people interested in a reverse mortgage still owe money on their home. If
this is your situation, you will be trading one loan for another, usually a larger one.
Some of the money you borrow with the reverse mortgage will be used to pay off
your current mortgage. If you owe a lot on your current mortgage, you may not
have much money from the reverse mortgage left over to spend on other things.
However, a reverse mortgage will free up money you have been using to make
monthly mortgage payments.
Existing
mortgage
New reverse
mortgage
loan
Monthly
interest and
fees
Monthly
interest and
fees
Equity
Debt
Alert
If you still owe a lot of money on your existing mortgage, you might not
have enough equity to pay off your current mortgage with a reverse
mortgage—which means you may not be able to get a reverse mortgage.
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What happens if I want to sell my home?
You might decide to sell your home while you have a reverse mortgage. You
may want to downsize, or move closer to family.
With a reverse mortgage, the money you borrow and the interest and fees
added to the loan balance shrink your equity. However, if home prices rise, you
might gain back some equity. It’s hard to predict how much, if any, equity will
be left when you sell your home.
What if my reverse mortgage balance is less than my home value?
So long as your reverse mortgage loan balance is less than the value of your
home, this works just like selling your house when you have a traditional mortgage:
Reverse
mortgage
loan
Monthly interest
and fees
Monthly interest
and fees
Sell home
to pay loan
and keep
difference
Equity
Debt
Alert
Home price increases are not guaranteed! During the housing crisis
between 2007 and 2012, home prices fell more than 25 percent overall,
and more than 50 percent in some areas.
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What if I owe more on my reverse mortgage than my home is worth?
If your loan balance is more than the value of your home, you may not have to pay
the difference. When you sell your home for the appraised fair market value, the
remaining balance of the loan is paid by mortgage insurance.
Reverse
mortgage
loan
Interest and
fees are added
to the loan each
month
Your loan
balance is more
than the value
of your home
Sell home for
appraised
value to pay
part of the
loan
Remaining
balance is
paid for by
mortgage
insurance
Equity
Debt
Caution
If you don’t meet your responsibilities with a reverse mortgage (see
pages 16-18), your loan could become due for repayment. In this case,
you will usually have to sell your home for the lesser of the loan balance
or 95 percent of its appraised value.
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What happens to my home when I pass away?
When the last remaining
borrower passes away, the
loan has to be repaid. Most
heirs will repay the loan by
selling the home.
How does it work when
the loan balance is less
than the home value?
Your heirs will use the loan
proceeds to repay the loan
and keep the difference.
How does it work when
the loan balance is more
than the home value?
Your heirs won’t have to
pay more than 95 percent
of the appraised value. The
remaining balance of the
loan is covered by mortgage
insurance.
Inherit home
worth more
than the loan
balance
Sell home
to pay loan
and keep
difference
Equity
Debt
Equity
Debt
Inherit home
worth less than
loan balance
Sell home for
95 percent
of appraised
value
Caution
If you plan to leave your home to heirs, talk to them about their repayment
options. If your heirs want to keep the home, they will have to repay either
the full loan balance or 95 percent of the home’s appraised value—whichever
is less.
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How much can I borrow?
Your “principal limit”
Your borrowing limit is called the "principal limit." It takes into account your age,
the interest rate on your loan, and the value of your home. In general, loans
with older borrowers, higher-priced homes, and lower interest rates will have
higher principal limits than loans with younger borrowers, lower-priced homes,
and higher interest rates.
Principal limit
Equity
Debt
Lower borrowing limit
§ Younger borrowers
§ Lower-valued homes
§ Higher interest rates
Higher borrowing limit
§ Older borrowers
§ Higher-valued homes
§ Lower interest rates
Question
Whose age is used if I am married or have a co-borrower?
If you are married or co-borrowing with another person, the
principal limit is based on the age of the youngest co-borrower,
or Eligible Non-Borrowing Spouse.
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What is a credit line growth feature?
Growing credit line
With the credit line growth feature, the less credit you use today, the more
you'll have available for the future. Whatever you don't use in your credit line
will keep growing, allowing you to borrow up to a maximum amount stated in
your mortgage.
The amount of credit line growth is based on the interest rate and mortgage
insurance premium. A credit line growth feature does not apply to the xed
rate payment option.
Example 2: Leaving credit available means your
borrowing limit will actually grow over time,
helping you keep pace with rising expenses
Example 1: If you max out
your credit up front, you
won't be able to borrow
more in the future
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Principal limit
Equity
Money you'll receive
Upfront costs
How much will it cost?
Reverse mortgages can be expensive. Like traditional mortgage loans, you
will owe not just the money you borrow, but also interest and fees. Unlike
traditional mortgage loans, the amount you owe grows over time.
Upfront costs
Like traditional mortgages, borrowers typically pay some one-time upfront
costs at the beginning of the loan. While you can pay these costs out of pocket,
you can typically choose to pay for them using your loan proceeds. This means
that you don’t have to bring money to the closing. But it’ll reduce the total
amount of money you get to use for other things.
Upfront costs include origination fees paid to the lender, real estate closing
costs paid to third-party professionals, and the initial mortgage insurance
premium paid to the FHA.
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Ongoing costs
Ongoing costs include interest, mortgage insurance premiums (MIP) and
servicing fees. These costs are charged each month. Interest and the MIP are
calculated as a percentage of your outstanding loan balance.
Ongoing costs are
added to your loan
balance each month.
These costs compound,
meaning each month you are
charged interest and fees
on the interest and fees that
were added to your previous
month’s loan balance.
Month 5
Loan balance
Interest + fees
Month 1 Month 2 Month 3 Month 4
Tip and question
§ The best way to keep your ongoing costs low is to borrow only as
much money as you need.
§ What is mortgage insurance and why do I have to pay for it?
If you or your heirs sell your home to pay off a reverse mortgage,
your loan balance may be more than your home is worth. Mortgage
insurance covers the remaining loan balance so you won’t owe more
than your home is worth. It also protects you in case your lender has
nancial difculty and can’t make payouts to you as agreed. Borrowers
pay for mortgage insurance as a requirement of a HECM loan.
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How do I receive my money?
You have three main options for receiving your money:
Line of credit (adjustable interest rate)
§ Higher mortgage insurance costs if you withdraw more than 60 percent in
the rst year.
§ Lower cost: pay interest and fees only on the money you’re ready to use.
§ Credit line growth feature*: unused credit continues to grow.
§ Can be combined with monthly payout.
Monthly payout (adjustable interest rate)
§ Higher mortgage insurance costs if you withdraw more than 60 percent in
the rst year
§ Get a set monthly payout to supplement income.
§ Two choices: Term (xed monthly payouts for a set number of years) or
Tenure (xed monthly payouts as long as you maintain the reverse mortgage).
§ Lower cost: pay interest and fees only on the money you’ve drawn so far.
§ Credit line growth feature is factored into monthly payout amount.*
§ Can be combined with a line of credit.
Lump sum (xed interest rate)
§ Withdraw all available funds at once. Amount available is usually lower
compared to other options.
§ Higher cost: pay interest and fees on entire loan amount.
§ No credit line growth feature.*
§ Higher risk for younger borrowers of outliving their loan funds.
*See page 9 for information on the credit line growth feature.
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How can a reverse mortgage affect the people living
with me?
Do you live with a spouse
or partner?
It is a good idea to make
your spouse or partner a
co-borrower.
When your spouse or partner
is a co-borrower, you are both
responsible for the loan and
both receive benets from
the reverse mortgage.
§ When your spouse or
partner is a co-borrower,
they will be able to remain
in the home after you no
longer live in the home.
§ A co-borrower will also
continue to receive benets
from the reverse mortgage
after you no longer live in
the home.
You and a co-borrower
may live in your
home with a
reverse mortgage
When you pass away or
move, the co-borrower
may remain in the
home and continue to
receive money from the
reverse mortgage
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What if your spouse isn’t a co-borrower on the reverse mortgage?
§ Only co-borrowers and some non-borrowing spouses have the right to remain
in the home after you pass away.
§ If your spouse is not on the reverse mortgage, but was married to you at the
time you took out the reverse mortgage, they may be able to remain in the
home after you move into a health care facility or pass away, if they qualify
under HUD's rules.
§ From the time you get a reverse mortgage, your non-borrowing spouse must
continue to live in the house as their principal (meaning primary) residence.
§ If you get married after you already have a reverse mortgage, your spouse can’t
stay in the home when you pass away unless they are your heir and are able to
pay off your loan.
§ Non-borrowing spouses do not receive money from a reverse mortgage after
the borrower dies.
Anyone may live with
you in your home with
a reverse mortgage
When you die or move
into a healthcare facility
for 12+ consecutive
months, your non-
borrowing spouse will
not receive loan money
and may have to move
out if they don't meet
certain requirements
Non-eligible spouses
will need to make other
living arrangements
after you die
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Do you live with someone age 62 or older who is not your spouse?
§ If this person wishes to remain in the home after you move or pass away,
consider making them a co-borrower.
§ If the person you live with isn’t a co-borrower, they will have to move out
when you move out or die, unless they are an heir and can either pay the
reverse mortgage debt or 95 percent of the appraised value with cash or a
new loan.
§ Make plans for the people you live with for where they will move after the last
borrower no longer lives in the home.
Anyone can live in
your home with you
when you have a
reverse mortgage
When the last co-borrower
or eligible spouse no longer
lives in the home, the loan
comes due for repayment
and others need to move out
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What are my responsibilities?
There are several requirements that HECM reverse mortgage borrowers
must follow. If you don’t meet these requirements, you could lose your home
to foreclosure.
1. Property taxes and homeowners insurance must be paid on time.
With a reverse mortgage, the way you pay your property taxes and
homeowners insurance could change. A lender will do a nancial assessment
to determine your options for paying your property taxes and homeowners
insurance. Your options may include:
§ You make direct payments to the insurance company and tax authority.
§ You make direct payments, but have some of your loan set aside to help you
with these payments.
§ The lender takes care of it for you by using your loan proceeds in a
set-aside account.
Question
What is a “set-aside?”
A “set-aside” is a portion of your loan that is reserved to pay some
repairs, taxes, homeowners insurance, and fees. Set-asides help make
sure you’ll have the funds to make these payments in the future.
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2. Your home must be kept in good repair.
You must make repairs as needed to keep your home well maintained. With a
reverse mortgage, your lender will let you know what repairs you may need to
make. Which situation applies to you?
Your current mortgage Reverse mortgage
repairs.
I routinely maintain my home and
make repairs, hiring professionals
when necessary.
That’s good. This is required with a
reverse mortgage.
My roof is missing a couple of shingles,
and my water heater is getting old.
These may not be emergency issues, but
they may require attention before they
become worse and cause damage to
your home.
My home is in good condition, but my
yard has become overgrown.
You will need to keep your entire
property maintained. A neglected yard
can eventually damage property.
My home needs major repairs. You may be required to make repairs
as a condition of getting a reverse
mortgage. Your lender may withhold
some of your loan proceeds to make the
required repairs.
Caution
Beware of scams! Beware of contractors who approach you about
getting a reverse mortgage to pay for repairs to your home. Learn
all your options. Do not let yourself be pressured into getting a
reverse mortgage.
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3. Your home must be your primary residence.
Every calendar year, you will be required to certify in writing that you occupied
your home as your primary residence. Which situation applies to you?
Your current mortgage Reverse mortgage
hs.
I live in my home year-round. You are already meeting this
requirement.
I split my time between my home and
another location.
OK, but you can only get a reverse
mortgage on the home where you spend
the majority of the year. Let your lender
know if you are going to be away for
more than two months.
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Have you explored other borrowing and housing options?
Homeowners interested in a reverse mortgage may nd that other loans or
housing choices are a better t for their nancial situation or personal needs.
Be sure to look at all of your borrowing and housing options before making
your nal decision. Consider alternatives to a reverse mortgage, such as:
Waiting
If you take out a reverse mortgage when you are too young, you may run out
of money when you’re older and more likely to have less income and higher
health care bills.
Other home equity options
A home equity loan or a home equity line of credit might be a cheaper way to
borrow cash against your equity. However, these loans carry their own risks and
usually have monthly payments. Qualifying for these loans also depends on
your income and credit.
Renancing
By renancing your current mortgage with a new traditional mortgage, you may be
able to lower your monthly mortgage payments. Pay attention to the term of your
new mortgage, as it can affect your retirement plan. For example, taking on a
new 30-year mortgage when you are nearing retirement can become a hardship
later. Consider choosing a shorter-term mortgage, such as 10 or 15 years.
Downsizing
Consider selling your home. Moving to a more affordable home may be your
best option to reduce your overall expenses.
Lowering your expenses
There are state and local programs that may provide assistance with utilities
and fuel payments as well as home repairs. Many communities also have
programs to help with property taxes: check with your county or town tax
ofce. Information about these and other benet programs is available through
the Administration for Community Living, acl.gov.
To learn more about reverse mortgages, visit consumernance.gov/
reversemortgage.
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About the Consumer Financial
Protection Bureau (CFPB)
The Consumer Financial Protection Bureau (CFPB) is a 21st century
agency that helps consumer nance markets work by making rules
more effective, by consistently and fairly enforcing those rules,
and by empowering consumers to take more control over their
economic lives.
The CFPB Ofce for Older Americans develops initiatives, tools,
and resources to help protect older consumers from nancial
harm and help older consumers make sound nancial decisions
as they age.
For more information about the CFPB, visit consumernance.gov.
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