- Sell it
- Rent it
- Borrow against it using either a cash-out refinance or a home-equity loan
People who take out reverse mortgages often:
- Have a regular need for additional funds
- Live on a fixed income with their home equity as their most significant asset
- Do not plan to leave their home to their heirs
Borrowers can repay reverse mortgages with other assets but typically repay them by selling the home. Any equity remaining after selling the home belongs to the homeowners or their heirs. Most reverse mortgages have a nonrecourse clause, meaning the debt cannot be passed along to the estate or heirs.
The amount borrowers receive depends on several factors, including:
- The current interest rate
- Loan fees
- The home's appraised value or the Federal Housing Administration's (FHA's) mortgage limits for the area, whichever is less
Loan Considerations Reverse mortgages involve several costs: origination fees, other up-front closing costs, as well as service fees during the term of the mortgage. Private mortgage insurance may also be required.
The amount owed on reverse mortgages generally grows over time. Interest is charged on the outstanding balance and added each month. If the debt exceeds the value of the property, the FHA or lender would take the losses due to the nonrecourse nature of most reverse mortgages.
Interest rates on reverse mortgages can be either fixed or variable. Because borrowers retain the titles to their homes, they remain responsible for property taxes and all other homeowner expenses. Failing to pay property taxes or maintain homeowners insurance puts borrowers at risk of the loan becoming due.
Eligible Property Types The home must be a one-to-four unit property, which includes townhouses, detached or manufactured homes, and units in condominiums. Condominiums must be FHA-approved.
How Are Payments Received?
In addition to taking a lump-sum payment, borrowers have five options:
- Tenure -- Indefinite equal monthly payments
- Term -- Equal monthly payments over a certain time period
- Line of credit -- A set amount borrowers can draw from whenever necessary
- Modified tenure -- Combination of line of credit and tenure
- Modified term -- Combination of line of credit and term