Signature RM Blog

Reverse mortgages: the basics

Who's eligible? Reverse mortgages are loans secured by the home that do not need to be repaid until the borrower dies, sells the home or moves out permanently. To get a reverse mortgage, you must be at least 62 years old and own your home, which must be your primary residence. There are no income requirements. It's OK to have an existing mortgage, but you must be able to get enough from the reverse mortgage to pay it off. You remain responsible for home maintenance, taxes and insurance.

What's the process? You need an appraisal and inspection, just as you do for a traditional mortgage. Counseling is mandated for government loans. "It's important to completely understand how the loan is structured," says Linda Altman, president of Customer First Mortgage in Orange Park, Fla.

What are the loan options? There are two basic types of loans: the HECM, which accounts for 90 percent of the market, and private reverse mortgages without federal mortgage insurance. "The HECM is still the gold standard," says Shelley Giordano of Wells Fargo Home Mortgage. "It's the most versatile product and best for most people."

HECM loans are insured by the U.S. government; with a private loan the lenders assume the risk. You can never owe more than the value of the home when it's eventually sold—if the value declines, the shortfall is covered. The main drawback of a HECM is that the Federal Housing Authority caps the appraisal, which affects the loan amount. Currently, the loan limit differs from county to county, from $200,160 to $362,790, but Congress may raise that to a single national limit of $417,000, or even higher.

Borrowers with more expensive houses sometimes turn to private loans, even though the costs may be higher. Ron and Carolann Prast of Scottsdale, Ariz., wanted to get out from under the weight of their monthly mortgage payment. They turned to Bank of America when they were told that a HECM would give them only about 45 percent of their home's $540,000 value. "With Bank of America we got about 65 percent," says Prast, 74, who continues to work part time as an accountant.

How much can you get? That depends on the home's value, location, interest rates and the age of the younger borrower if there are co-owners. You won't get anywhere near the appraised value of your house—expect between 50 and 70 percent. What's more, appraisal and legal fees, origination fees, mortgage insurance premiums and monthly service fees come off the top.

The loan can be taken in a lump sum, as monthly payments, as a line of credit or as a combination of these options. Untapped funds in a line of credit generally increase, allowing homeowners to borrow more money over time.