Consumer Facts for Older Americans

Tips for Consumers on Reverse Mortgages 

What is a reverse mortgage? 

A reverse mortgage is a complex home loan for senior homeowners who have built up substantial equity in their property. ¹ In a reverse mortgage the lender loans you money based on the value of your home, the amount of equity you have in the home, and your age at the time of the loan application.  The lender pays you the money either in a lump sum, in monthly installments, or as a line-of-credit.  Unlike a traditional home equity loan or second mortgage, repayment is not  required until you sell your home, move out permanently, or die.  The amount of money you owe increases over time because you do not make payments.  If you sell your home, you can keep any proceeds from the sale of your home in excess of what you owe the lender.  

To qualify for a reverse mortgage, you must be at least 62 years old.  The mortgage on your home must be completely or nearly paid off.  You can get a reverse mortgage regardless of your current income.   

What should I consider before applying for a reverse mortgage? 

Reverse mortgages are more expensive and complex than traditional loans.  Before applying for a reverse mortgage you should consider the following. 

• The costs of obtaining a reverse mortgage can be very high.  You may have to pay some of these costs in cash.  However, most lenders allow a portion of these costs to be financed as part of the loan balance. In addition, interest, insurance and service charges will be added monthly to the loan balance. Thus, the amount you owe the lender increases over time. 
• Is there another, less costly, means of adding to your income or meeting your financial goal? For example, you may reduce your expenses if you qualify for such benefits as a property tax credit or abatement. Even if you determine that you need a loan, another type of loan may better meet your needs and be less expensive than a reverse mortgage.
• The amount of the loan may not meet your current and future needs.  For example, a 65-year old with $50,000 in home equity who wanted a reverse mortgage as a monthly income supplement may get as little as $100 per month on a term mortgage.²
• With a reverse mortgage you will retain title to your home and continue to be responsible for paying the property taxes, insurance and for the general upkeep of the property. 
• A reverse mortgage may affect your continued eligibility for need-based government benefits programs such as Supplemental Social Security (SSI) and Medicaid.  Monthly payments from the loan must be spent within the month they are received. If not, such payments will be considered "income," and may make you ineligible for public benefits. You should contact your benefits provider to ask about how a reverse mortgage may affect your eligibility.
•  A reverse mortgage may not be right for you if you want to leave your home, free and clear, to your children or others who will inherit from you.  Your relatives will not be able to inherit from you unless they pay off the loan after you have passed away.
• You may be offered the option of using some or all of a lump sum payment to purchase an annuity.  An annuity is an insurance product.  Monthly payments are made to the you for the rest of your life. The IRS does not tax loan advances as income, but annuity advances may be partially taxable.  See a tax professional for guidance.
• Beware of reverse mortgage scams!  For example, some senior homeowners have been contacted by firms offering to assist them in finding a lender that does reverse mortgages, in exchange for a "small percentage" of the loan.  This information is available for free from the Department of Housing and Urban Development (HUD) by calling toll-free, 1-888-466-3487.  You will be referred to a HUD-approved housing counseling agency.
• Compare offers for reverse mortgages.  Reverse mortgages vary in cost.  Of course, the cost of the loan affects how much cash you ultimately receive from the loan.
• As with any loan, do not sign anything you don't understand.  Do not sign a loan application with blank spaces.

Where do I go for help? 

Evaluating reverse mortgage options may be confusing.  Before you apply for a reverse mortgage you should get counseling from an impartial housing counselor.  A counselor can help you decide if a reverse mortgage is right for you, or help you choose among the different types of reverse mortgages.  A counselor may also help you identify and apply for public benefits.  Such benefits may reduce your expenses or increase your income and do away with the need to apply for a reverse mortgage. 

Free counseling is available from HUD-approved housing counseling agency.  For referral to a HUD-approved housing counseling agency call 1-888-466-3487.   

This brochure was supported, in part, by a grant, number 90-AM-2041, from the Administration on Aging, Department of Health and Human Services, Washington, D.C.  20201.  Grantees undertaking projects under government sponsorship are encouraged to express freely their findings and conclusions.  Points of views or opinions do not, therefore, necessarily represent official Administration on Aging policy.

¹ Equity equals the value of your house minus what you owe on the mortgage.  The longer you have lived in the house and paid off your mortgage, the less you owe and therefore the more equity you have.   

²  This calculation varies for different lenders and it depends on a variety of factors, including regional loan limits, interest rates, and the amount of the closing.