What You Can Receive From a Reverse Mortgage

Quick answer

• The amount you can receive from a reverse mortgage depends on several factors, including your age, home’s value, current interest rates, and the specific loan product.
• You can receive funds as a lump sum, a line of credit, monthly payments, or a combination of these.
• The loan balance grows over time as interest and fees are added, reducing the equity available for your heirs.
• You must meet eligibility requirements, including being at least 62 years old and owning your home outright or having a significant amount of equity.
• It’s crucial to understand all costs, including origination fees, mortgage insurance premiums, and servicing fees.
• Seek independent advice from a HUD-approved counselor before proceeding.

Who this is for

• Homeowners aged 62 and older who are looking for ways to access their home equity without selling their home.
• Individuals who want to supplement their retirement income or cover unexpected expenses.
• Those who plan to stay in their home for the foreseeable future.

What to check first (before you act)

Goal and timeline

Before considering a reverse mortgage, clearly define why you need the funds and when you need them. Are you looking to supplement monthly income for the next 10-20 years, or do you need a lump sum for a specific large expense, like medical bills or home modifications? Your timeline will influence how you structure the payout and how long the funds need to last.

Current cash flow

Analyze your current income and expenses. A reverse mortgage should ideally complement your existing financial resources, not replace essential income without a clear understanding of long-term implications. If your monthly expenses already exceed your income, a reverse mortgage might offer a temporary solution, but it’s important to have a broader financial plan.

Emergency fund or safety buffer

Do you have an emergency fund? A reverse mortgage is not intended to be an emergency fund. It’s crucial to have separate savings for unexpected events like major home repairs or medical emergencies to avoid depleting your reverse mortgage funds prematurely.

Debt and interest rates

Evaluate any existing debts, especially high-interest ones like credit cards or personal loans. While a reverse mortgage can sometimes be used to pay off an existing mortgage, it’s essential to compare the interest rate on your current debt with the potential costs of a reverse mortgage. High-interest debt should generally be a priority for repayment.

Credit impact

A reverse mortgage is a loan, and while it doesn’t require a credit score check in the traditional sense for qualification, your ability to manage the loan’s ongoing obligations (like property taxes and homeowners insurance) is paramount. Failing to meet these obligations can lead to foreclosure, which would negatively impact your credit.

Step-by-step (simple workflow)

Step 1: Determine Eligibility

What to do: Verify you meet the basic requirements: at least 62 years old, own your home outright or have substantial equity, and the home must be your primary residence.
What “good” looks like: You meet all the age, ownership, and residency criteria.
A common mistake and how to avoid it: Assuming you’re eligible without checking the specific details for your situation. Avoid this by reviewing the official guidelines for the type of reverse mortgage you’re considering.

Step 2: Attend a Counseling Session

What to do: Schedule and complete a mandatory counseling session with an independent, HUD-approved reverse mortgage counselor.
What “good” looks like: You have a thorough understanding of the loan’s terms, costs, benefits, and implications from a neutral third party.
A common mistake and how to avoid it: Skipping or rushing through the counseling session. Avoid this by asking all your questions and ensuring you comprehend the information before moving forward.

Step 3: Choose a Reverse Mortgage Product

What to do: Decide which type of reverse mortgage best suits your needs (e.g., Home Equity Conversion Mortgage – HECM, or proprietary loan).
What “good” looks like: You’ve selected a product that aligns with your financial goals and risk tolerance after understanding the differences.
A common mistake and how to avoid it: Not comparing different loan types or only looking at one lender. Avoid this by researching HECM options and proprietary loans, and understanding their fee structures and payout options.

Step 4: Undergo Financial Assessment

What to do: The lender will assess your ability to pay property taxes, homeowners insurance, and maintain the home.
What “good” looks like: You demonstrate a clear plan to cover these ongoing obligations, either through existing income, assets, or a portion of the reverse mortgage proceeds set aside.
A common mistake and how to avoid it: Underestimating the ongoing costs or not having a viable plan for them. Avoid this by creating a detailed budget that includes these expenses and discussing it openly with your counselor and lender.

Step 5: Home Appraisal

What to do: The lender will order an appraisal to determine your home’s current market value.
What “good” looks like: The appraisal accurately reflects your home’s value, which is a key factor in calculating your loan amount.
A common mistake and how to avoid it: Believing the appraisal will be higher than market value or not understanding how it impacts your loan. Avoid this by preparing your home for the appraisal and understanding that it’s a standard process to determine the loanable amount.

Step 6: Loan Application and Underwriting

What to do: Submit your formal loan application and undergo the lender’s underwriting process.
What “good” looks like: Your application is complete, and the lender approves your loan based on all the assessments.
A common mistake and how to avoid it: Providing incomplete or inaccurate information, leading to delays or denial. Avoid this by gathering all necessary documents beforehand and being truthful in your application.

Step 7: Closing

What to do: Sign the loan documents, which will typically occur at a title company or attorney’s office.
What “good” looks like: You understand all the final documents and your rights and responsibilities as a borrower.
A common mistake and how to avoid it: Signing documents without fully understanding them. Avoid this by asking questions about any part of the closing documents you find unclear.

Step 8: Receive Funds

What to do: Once the loan is closed and recorded, you will receive your funds according to the payout option you selected.
What “good” looks like: You receive your funds promptly and as agreed upon in your loan agreement.
A common mistake and how to avoid it: Not having a plan for the funds once they are received. Avoid this by having a clear purpose and budget for the money before you get it.

Common mistakes (and what happens if you ignore them)

Mistake	What it causes	Fix
Not understanding the loan is a debt that grows over time	Reduced equity for heirs, potential for the loan balance to exceed the home’s value	Review loan statements carefully, discuss with counselor and heirs.
Failing to pay property taxes and homeowners insurance	Foreclosure, loss of home	Set up automatic payments, budget for these costs, or use loan proceeds if structured for it.
Not maintaining the home as required	Loan default, potential foreclosure	Address necessary repairs promptly, ensure the home remains in good condition.
Treating the reverse mortgage like free money	Depleting funds too quickly, running out of money before leaving the home	Create a budget for the funds, prioritize essential needs and planned expenses.
Not involving heirs in the decision-making process	Misunderstandings and disputes after the borrower’s passing	Discuss the loan openly with heirs, explain its purpose and implications.
Assuming the home will always appreciate enough to cover the loan	Risk of the loan balance exceeding the home’s value, leaving no equity for heirs	Understand that home values can fluctuate, and the loan grows regardless.
Not comparing loan products and lenders	Paying higher fees or accepting less favorable terms	Shop around, compare HECM and proprietary options, and understand all associated costs.
Believing a reverse mortgage is a government handout	Misunderstanding the loan’s nature and ongoing obligations	Recognize it’s a loan with interest and fees that must be repaid.
Not seeking independent financial advice	Making decisions based solely on lender information	Consult with a financial advisor or estate planner in addition to the required counselor.

Decision rules (simple if/then)

• If you need consistent monthly income for retirement, then consider a tenure or term payment plan because these provide regular payments.
• If you want access to funds for unpredictable expenses, then a line of credit may be a better option because it allows you to draw funds as needed.
• If your home has significant equity, then you will likely qualify for a larger loan amount because reverse mortgage limits are tied to home value.
• If you are younger than 62, then you are not eligible for a HECM reverse mortgage because the minimum age requirement is 62.
• If you have substantial existing debt, then explore using a lump sum payout to pay off high-interest debt first because this can improve your overall financial health.
• If you plan to move in the next few years, then a reverse mortgage might not be the best solution because the upfront costs can be significant and may not be recouped.
• If your primary goal is to leave an inheritance, then carefully consider the loan balance growth and its impact on heirs because the loan amount increases over time.
• If you don’t have a plan for ongoing property taxes and insurance, then you risk foreclosure because these are borrower responsibilities.
• If you have a spouse or partner who is not on the loan title, then ensure they understand their rights and protections as a non-borrowing spouse because this is a critical consideration.
• If you are considering a proprietary reverse mortgage, then understand that these are offered by private lenders and may have different features and limits than HECMs.
• If you are uncomfortable with the idea of a growing loan balance, then a reverse mortgage might not be the right fit for your financial psychology.

FAQ

How is the amount I can receive from a reverse mortgage calculated?

The amount is determined by your age (or the youngest borrower’s age), the home’s appraised value, current interest rates, and the specific reverse mortgage product chosen. Generally, older borrowers and those with higher home values can borrow more.

Can I get a lump sum payment from a reverse mortgage?

Yes, a lump sum payout is one of the options, but it may not be the most advantageous for all situations due to how interest accrues. It’s often available for HECM loans, but there might be limits on how much you can take upfront.

What are the ongoing costs of a reverse mortgage?

You are responsible for paying property taxes, homeowners insurance, and maintaining the home. The loan also has servicing fees and, for HECM loans, annual mortgage insurance premiums.

Will my heirs inherit debt from my reverse mortgage?

Your heirs will inherit the home, but they will also inherit the reverse mortgage debt. They will need to repay the loan balance or sell the home to pay it off. If the home’s value is less than the loan balance, the heirs are generally not responsible for the difference if it’s a HECM loan.

What happens if I need to move out of my home?

If you move out permanently, sell the home, or pass away, the loan becomes due and payable. Your heirs or you will have a specific period to repay the loan or sell the home.

Can I still get a reverse mortgage if I have a mortgage on my home?

Yes, but you must have enough equity to pay off the existing mortgage balance with the reverse mortgage proceeds. The reverse mortgage loan will then replace your old mortgage.

What is the difference between a HECM and a proprietary reverse mortgage?

A Home Equity Conversion Mortgage (HEECM) is a government-insured product, making it the most common type. Proprietary reverse mortgages are offered by private companies and may have different eligibility requirements, loan limits, and features, often for higher-valued homes.

Can I use reverse mortgage funds for anything?

You can use the funds for any purpose, such as supplementing retirement income, paying for healthcare, home improvements, or travel. However, it’s wise to have a plan for how you will use the money.

What this page does NOT cover (and where to go next)

• Specific financial planning strategies for integrating reverse mortgage income into a broader retirement portfolio.
• Detailed comparisons of specific reverse mortgage lenders and their unique offerings.
• Estate planning advice for ensuring your heirs are well-prepared for the reverse mortgage repayment process.
• In-depth analysis of proprietary reverse mortgage products beyond general distinctions.
• Legal advice regarding reverse mortgage contracts and borrower rights.