All About Reverse Mortgages

A reverse mortgage allows individuals age 62 or older to borrow money against the equity of their home. This makes it possible to have cash available for emergencies, such as medical expenses.

A reverse mortgage is a type of loan granted to people who are 62 years old or older. It allows them to convert part of the equity of their house into cash without having to sell their house or pay additional monthly bills. Senior citizens typically get a reserve mortgage to pay medical bills, living expenditures or existing mortgage payments.

How Does a Reverse Mortgage Work?
A reverse mortgage is a kind of loan that allows homeowners to give up the equity of their home in exchange for a regular income. Cash payments can be received as a line of credit, lump sum or in installments, provided that the borrower lives in the house. The maximum amount of money that a homeowner can get depends on several factors, including their age, outstanding debt and the value of their house.

Reverse Mortgage Eligibility Requirements
To qualify for a reverse mortgage, homeowners need to be at least 62 years old, own the house fully and have a low balance on an existing mortgage. Banks and other lending companies also require homeowners to have the money necessary to continue paying home insurance, property taxes and other housing costs. The Federal Housing Administration (FHA) also requires that homeowners do not have any delinquent federal loans.

Types of Reverse Mortgages
There are three types of reverse mortgages. These include single-purpose reverse mortgages, which are the least expensive option and may be used only for one purpose, which the lending company specifies; proprietary reverse mortgages, which are insured by private companies that offer them; and home equity conversion mortgages (HECMs), which are insured by the FHA and can be used for any purpose.

Fees and Costs of a Reverse Mortgage
Getting a reverse mortgage comes with a number of fees, including origination fees, interest payments, closing fees and mortgage insurance. Origination fees are typically charged by lending companies to cover the cost of processing documents and creating each unique loan. The maximum origination fee for HECM loans is about two percent of the first $200,000 of the home's value and one percent of the remaining amount. Therefore, if the value of the house is $350,000, for instance, its origination fee would be $5,500. Origination fees for more expensive homes are capped at $6,000.

With all the fees factored in, the cost of getting a reverse mortgage can be quite expensive. The annual interest rate alone is about five percent for fixed-rate mortgages and about 4.5 percent for adjustable-rate mortgages. Mortgage insurance typically costs around 1.25 percent of loan amount. Closing costs charged by private lending companies can total a few hundred dollars and include inspection fees, credit report fees and document preparation fees.

Interest payments and other relevant fees can also add up over the term of the reverse mortgage. For this reason, most reverse mortgage contracts come with a "non-recourse" clause, which ensures that the total cost of debt doesn't exceed the value of the property. This means that a borrower, his estate or his heirs will not be left underwater once the loan is due.