Reverse mortgage

Quick definition

A reverse mortgage is a loan product designed to give older homeowners the opportunity to benefit from the equity in their house.

Key details

• Reverse mortgages release equity in your home for you to spend on other things
• They are generally only available to homeowners of retirement age
• With a reverse mortgage, the money is paid out on a monthly basis rather than as a lump sum

What is a reverse mortgage?

A reverse mortgage or HECM (Home Equity Conversion Mortgage) is a loan product designed to give homeowners over the age of 62 the option to benefit from equity accumulated in their primary residential property.

While reverse mortgages are primarily considered as a means to providing retirees of low income cover uninsured health care or monthly living expenses, there is no legal restriction on how the loan can actually be used. HECM reverse mortgages were created by and are regulated by the U.S. Department of Housing and Urban Development but are issued by a private mortgage lender.

The DHUD also insures reverse mortgage loans against the lender not being able to make the loan payments or market conditions meaning that the final sale of the house does not cover the loan’s repayment.

While less common, proprietary reverse mortgage loans also exist which are not insured by the DHUD. These are insured by the issuing mortgage company and are not regulated in the same way as HECM formats though most issuers do implement the same consumer protection practices. Proprietary reverse mortgage loans tend to only be offered on higher value properties worth at least $750,000.

How does a reverse mortgage work?

First the borrower contacts a lender and undergoes an assessment. The maximum total value of the loan will depend upon the value of the property, the borrower’s age and current interest rates.

Borrowers are obliged to go through a counselling session in order to ensure that they are fully aware of the implications and obligations involved in them taking an HECM reverse mortgage loan and a financial assessment.

The financial assessment is an appraisal of the borrower’s ability to cover ongoing costs associated with the property over the term of the loan, such as property taxes and homeowners insurance. Once approved, the borrower receives monthly payment instalments from the lender.

This is where a reverse mortgage differs most from a standard loan. The borrower does not receive a lump sum which subsequently has to be paid back in instalments. Rather, they receive monthly payments from the lender with the value of the loan not paid back until the home is sold or has been vacated for at least a year. These scenarios would be expected to take place upon the death of the borrower or their movement into a permanent care facility.

The borrower can choose how to break up the instalments of the loan’s full value but cannot receive more than 60% of the approved total over the course of the first year of the loan.

How to find the best deal on a reverse mortgage

The best approach to sourcing the best reverse mortgage terms is essentially the same as with any other loan product, you have to shop around. Reverse mortgages tend to be offered predominantly by middle-sized and smaller U.S. lenders.

It’s a competitive industry so attractive terms can be found by comparing different providers. There are a number of online resources that offer comparison services on reverse mortgage terms but always make sure you double check the terms yourself.

If you do not feel completely confident you can personally appraise the offers accurately make sure you get a trusted family member, friend or professional to help, or even a couple just to be on the safe side.