What is a Reverse Mortgage Loan?
A reverse mortgage is a home loan designed for older homeowners who either own their home outright or have built substantial equity. It allows eligible borrowers to convert a portion of that home equity into available funds while continuing to own and live in their home. In most cases, the proceeds received from a reverse mortgage are not considered taxable income.
While several types of reverse mortgages are available, the FHA-insured Home Equity Conversion Mortgage (HECM) is the most common reverse mortgage in the United States. HECMs are available to eligible homeowners age 62 and older. Unless otherwise noted, the information that follows refers specifically to the HECM reverse mortgage program.
*This information does not constitute tax advice. Please consult a tax advisor regarding your specific situation.
You may also see a reverse loan referred to as a Home Equity Conversion Mortgage (HECM). This variation of reverse mortgage loan is insured by the U.S. Government's Federal Housing Administration (FHA) and is only available through FHA-approved lenders.
Potential Advantages of a Reverse Mortgage Loan
You can receive money from the equity you have in your home, and it is usually tax free.*
You can receive these loan proceeds in a lump sum, in a line of credit, in a monthly cash flow payment or in a combination of these three options.
You may be able to eliminate your monthly mortgage payment.
With a reverse mortgage loan, you can refinance a traditional mortgage and free yourself of the burden of fixed monthly mortgage payments, as long as you live in your home as a primary residence, stay up to date on property taxes and homeowners insurance (and homeowners association dues, if applicable) and maintain the home.
You will never owe more than what your home is worth when your loan matures and your home is sold.**
When a maturity event occurs (e.g., the property is no longer the principal residence of at least one borrower) and the loan becomes due and payable, neither you nor your heirs are responsible for paying the deficit if the balance owed on your reverse mortgage exceeds the home value. If at the time of your passing your heirs wish to keep your home, they can purchase it for 95% of the current appraised value of the property or the balance owed, whichever is less.
**There are some circumstances that will cause the loan to mature and the balance to become due and payable. Borrower is still responsible for paying property taxes, insurance and maintenance (and HOA fees, if applicable). Credit is subject to age, property and some limited debt qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.
You may be able to bridge the Medicare gap from age 62 to 65.
Many seniors delay retirement until they are 65 because they cannot afford to pay for their health insurance before Medicare kicks in at age 65. With a reverse mortgage loan, you can avoid paying income tax on money drawn from an IRA or other accounts to help keep your retirement funding plan in place without diminishing your current assets.***
***This information does not constitute financial planning advice. Please consult a financial planner regarding enhancements to retirement plans.
You may be able to pay for long-term care expenses.
With the proceeds from a reverse mortgage loan, you could purchase long-term care insurance to handle these expenses without losing your home in the process.
Reverse Mortgage Loan FAQs
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. Youngest borrower must be at least 62 years old. Your monthly reverse mortgage advances may affect your eligibility for some other programs. At the conclusion of the term of the reverse mortgage loan contract, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to you and you may need to sell or transfer the property to repay the proceeds of the reverse mortgage with interest from your assets. We will charge an origination fee, a mortgage insurance premium, closing costs or servicing fees for the reverse mortgage, all or any of which we will add to the balance of the reverse mortgage loan. The balance of the reverse mortgage loan grows over time and interest will be charged on the outstanding loan balance. You retain title to the property that is the subject of the reverse mortgage until you sell or transfer the property and you are therefore responsible for paying property taxes, insurance, and maintenance and related taxes. Failing to pay these amounts may cause the reverse mortgage loan to become due immediately and may subject the property to a tax lien or other encumbrance or to possible foreclosure. Interest on reverse mortgage is not deductible to your income tax return until you repay all or part of the reverse mortgage loan. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity.
If you still have questions about how these programs work or other mortgage topics, be sure to visit our comprehensive FAQ page for more detailed answers.
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