Who Qualifies
To be eligible for a HECM reverse mortgage, you must meet these rules:
- Age: At least 62 years old. If married, the younger spouse's age sets the loan amount. A younger spouse means a smaller payout.
- Primary home: The home must be where you live. Rental and vacation homes do not qualify.
- Home type: Single-family homes, FHA-approved condos, and some built homes qualify.
- Equity: You need strong equity in the home. Most lenders want at least 50%.
- Counseling: You must finish a session with a HUD-approved counselor first. This session covers costs, options, and duties tied to the loan.
How the Reverse Mortgage Funds Are Distributed
You can get your reverse mortgage funds in several ways:
- Lump sum: One payout at closing. Only comes with a fixed interest rate.
- Monthly payments: Steady income for a set time or as long as you live in the home.
- Line of credit: Draw funds as needed. The unused portion grows over time.
- Mix: Combine monthly payments with a line of credit for more options.
You do not repay the loan until you sell the home, move out for good, or pass away. At that point, the loan balance is paid from the sale of the home.
Costs to Expect
Reverse mortgages come with several fees:
- Closing costs: These include loan fees, title insurance, appraisal fees, and filing charges. HECM closing costs can run several thousand dollars.
- Mortgage insurance: HECM loans charge an upfront premium (2% of the home's value) and a yearly premium (0.5% of the balance). This insurance protects both borrowers and heirs if the loan grows past the home's value.
- Interest: Interest builds on the loan over time. You do not make monthly payments. The interest gets added to what you owe.
These costs usually roll into the loan balance. You do not pay them out of pocket. But they shrink the equity left for your heirs over time.
What Happens to the Home When You Pass Away
When the last borrower passes away or moves out for good, the loan comes due. Your heirs have choices:
- Sell the home and use the sale to repay the loan. Any leftover equity goes to them.
- Pay off the loan (or 95% of the home's value, whichever is less) and keep the home.
- Walk away. If the loan is worth more than the home, your heirs owe nothing. HECM loans are non-recourse. The lender can only collect from the home, not from other assets or your family.
The loan is insured by the FHA. The government covers any gap between the loan balance and the sale price.
Reverse Mortgages and Your Estate Plan
A reverse mortgage affects your estate plan in key ways:
- Trust fit: If your home is in a living trust, the trust may need certain language to keep you eligible. Most revocable living trusts qualify. But the lender will review the trust papers.
- Smaller inheritance: The loan balance grows over time. That means less equity for your heirs. Make sure your family knows how this changes what they will receive.
- Your duties: Property taxes, home insurance, and upkeep are still your job. Falling behind on any of these can put the loan in default.
Before you pursue a reverse mortgage, talk with your estate planning advisor. Make sure it fits your overall retirement income plan and your goals for passing assets to your family.