Imagine you’ve lived in your cozy home for many years, and it’s filled with happy memories. Now, you might be thinking about how to enjoy your retirement without having to worry about money as much. A reverse mortgage can be a helpful tool for seniors like you who are 62 and older. Here’s the basic idea:

* A reverse mortgage lets you tap into the equity you’ve built up in your home over the years. Equity is basically the difference between what your home is worth and what you still owe on it (if anything).
* Instead of making monthly payments to the bank like a regular mortgage, with a reverse mortgage, the bank makes payments to you! These payments can come in a lump sum, monthly installments, or even a line of credit you can draw on as needed.
* Most importantly, you get to stay in your home as long as you live there and continue to meet the loan requirements, which typically involve paying property taxes and homeowners insurance.

Think of it like using your home’s value to get some extra cash flow during your retirement. It’s a way to age comfortably in your familiar surroundings without having to sell your home.

Now, keep in mind, a reverse mortgage isn’t free money. There are costs involved, and we’ll be sure to cover those in the next section. But for now, this should give you a basic understanding of how a reverse mortgage works.

To become eligible for a reverse mortgage, you must be at least 62 years old and own your home. You must have equity in the house to pay off any outstanding balances, and your home must be occupied as your principal residence. All applicants are subject to a financial assessment to determine their financial capacity and willingness to pay obligations as part of the qualification process.

The amount of money that a lender will loan depends on how old you are at the time of closing, how much your house is worth, the total amount of liens, and interest rates. The payoff of your existing mortgage and mandatory obligations along with the payment option chosen will affect the amount of money you will receive. HUD limits borrowers to using 60% of the available money (after closing costs & fees) in the first year. The remaining funds are accessible beginning year two. This maximum disbursement limit set by HUD allows for the GREATER of:

• 60% of the Principal Limit (amount of money available to the borrower in all years of the loan) in the first twelve months of the loan from your closing date OR…
• The sum of Mandatory Obligations (existing mortgage payoff, tax liens, closing costs, mortgage insurance premium) plus 10% of the Principal Limit. This total cannot exceed the total Principal Limit at the time of loan closing.

There are several different options to choose from. You can take the money in a lump sum (up to HUD’s first-year maximum withdrawal)*, set up a line of credit, monthly payment, or a combination of all three. In the first year, the Line of Credit or monthly Tenure Payments or monthly payments cannot exceed 60% of the Principal Limit. After the first year, the available Line of Credit or Tenure/Monthly payments will be increased when applicable.

• Fixed interest rate reverse mortgages only allow for the Single Disbursement Lump Sum payment plan.

The fees and cost of a reverse mortgage are based on a number of items. For example, an origination fee is paid to the broker/lender, a MIP (mortgage insurance premium) is paid to FHA on the Home Equity Conversion Mortgage (HECM), an appraisal fee, a flood certification fee, a document preparation fee, title, settlement, and escrow fees. All costs are clearly shown on the Good Faith Estimate (GFE). Monthly servicing fees could apply.

FHA requires a Mortgage Insurance Premium (MIP) to be collected at closing and during the life of the loan. These premiums are charged to the borrower’s loan balance. The upfront Mortgage Insurance Premium (MIP) is calculated using your home’s appraised value or a maximum of $1,089,300 (the 2023 national HECM limit cap) and is charged at closing. The ongoing FHA insurance premiums are calculated using each month’s outstanding loan balance.

Yes. Counseling is required with an independent third party HUD-approved counselor to protect borrowers from receiving incorrect information about reverse mortgages. The lender must be in receipt of the counseling certificate before they can close the loan. To locate a reverse mortgage counselor near you, contact your Mortgage Loan Originator or your local HUD office.

While the proceeds you receive from a reverse mortgage are typically not subject to individual income taxation, you will need to consult your tax advisor.

A reverse mortgage was created so borrowers don’t have to pay most fees during the course of the loan. Typical upfront costs are for the appraisal and HUD-approved reverse mortgage counseling (some agencies waive counseling fees at their discretion). However, there may be a monthly servicing fee associated with reverse mortgages (which will be financed and added to the loan balance). For more information on the service set-aside, please talk to your Mortgage Loan Originator.