Reverse Mortgages: What Seniors and Families Need to Know

A reverse mortgage allows homeowners aged 62 or older to convert a portion of their home equity into cash, while continuing to live in the home. No monthly mortgage payment is required; the loan is repaid when the borrower sells the home, moves out, or passes away. Reverse mortgages are controversial because they are often misunderstood and sometimes misrepresented. Coventry Enterprises of America provides a balanced explanation.

How Reverse Mortgages Work

The most common type is the FHA-insured Home Equity Conversion Mortgage (HECM). Loan proceeds can be received as a lump sum, monthly payments, a line of credit, or some combination. The amount available depends on the borrower's age, the home's value, and current interest rates. Generally, older borrowers with higher-value homes qualify for more.

Interest accrues on the outstanding balance but does not require monthly payment. The growing balance, compounded over years, can consume most or all of the home's equity by the time the loan is due. Heirs who want to keep the property after the borrower's death must pay off the reverse mortgage, typically by refinancing into a conventional loan.

Eligibility and Requirements

HECM borrowers must be 62 or older, own the home outright or have significant equity, and occupy the property as their primary residence. The home must meet FHA standards. Before taking out a HECM, borrowers are required to complete counseling from a HUD-approved housing counselor. This counseling requirement exists specifically because reverse mortgages are complex and often misunderstood.

Common Misconceptions

Misconception 1: The bank takes your home. The borrower retains title and ownership throughout the loan. The lender holds a lien against the property. The home does not become the bank's property at signing.

Misconception 2: You can never owe more than the home is worth. HECM loans are non-recourse, meaning neither you nor your heirs can be pursued for any amount beyond the home's value. The FHA insurance covers any shortfall.

Misconception 3: It is free money. The fees on a HECM include an upfront MIP of 2 percent, an ongoing annual MIP of 0.5 percent, origination fees, and closing costs. On a $400,000 home these upfront costs can easily exceed $15,000.