A reverse mortgage can limit your options down the road.
You could use up your equity, so you get nothing when you or your estate eventually sells the home. That means you could come up short if you want to move to a smaller home, an assisted living facility, or to another locale to be closer to family.
The 60% Utilization Rule
Home equity conversion mortgage HECM borrowers may only take the greater of 60% of their total available equity or the total amount of their mandatory obligations plus 10% in the first payout.
Eligibility for HECM and other reverse mortgages might require that your home be in structurally good condition and free of major problems, such as termite damage and roof leaks. An InterNACHI inspector should be hired to check for these and other defects.
A borrower can only take out a reverse mortgage on a home they own and live in for the majority of the year. If the borrower leaves the home for more than six consecutive months for a non-medical issue or 12 consecutive months for a medical issue, the loan will become due.
The homeowner is responsible for the upkeep of the home on a HECM. The homeowner continues to bear all the responsibilities of a homeowner, including making repairs and paying taxes and insurance. In a reverse mortgage, there is no regulatory requirement for an escrow account for payment of taxes and insurance.
If your reverse mortgage loan is in default and you've received a notice that the loan is “due and payable,” you may sell your home for 95 percent of its appraised value.
The problem, say advocates, is that many senior homeowners don't understand the fine print in a reverse mortgage. Some wrongly assume the lender will pay the taxes and insurance. But fall behind on those payments or fail to maintain the home, and the lender can foreclose.
When applying for a reverse mortgage, the lender will require an appraisal to determine the value of your home. The cost of this appraisal is typically paid by the borrower. The lender may also require a credit report to be run as part of the application process.
Can I run out of money with a reverse mortgage? Yes, the amount of borrowed funds can dry up in this case. However, you can in fact remain in your home should this happen—provided you continue to live there, maintain it, and stay current on required taxes and insurance.
Suze Orman's opinion on reverse mortgages
She has spoken out against these loans on numerous occasions, warning that they can be a risky financial decision for many older Americans. One of Suze's main concerns with reverse mortgages is that they can be incredibly expensive.
If the end of your term is up before you pass away, then you have outlived your reverse mortgage proceeds. With a term payment plan, you reach your loan's principal limit—the maximum you can borrow—at the end of the term. After that, you won't be able to receive additional proceeds from your reverse mortgage.
A reverse mortgage may be a good idea if:
You and your spouse/partner are both 62 or older. You are in a strong financial position. You are able to physically maintain your home.
Yes, you can sell a house with a reverse mortgage. Your lender cannot force you to sell the home, but you are able to sell it at any time if you choose to do so. However, keep in mind that when you sell the home, your reverse mortgage comes due — and you'll need to pay off the loan balance, plus interest and fees.
How Much Money Do You Get From a Reverse Mortgage? The amount of money you can borrow depends on how much home equity you have available. You typically cannot use more than 80% of your home's equity based on its appraised value. In 2023, the maximum amount anyone can be paid from a HECM reverse mortgage is $1,089,300.
The seller often does not generally get a copy of the appraisal, but they can request one. The CRES Risk Management legal advice team noted that an appraisal is material to a transaction and like a property inspection report for a purchase, it needs to be provided to the seller, whether or not the sale closes.
You're still responsible for paying property taxes and insurance, and if you default on your property taxes, you could lose your home to tax foreclosure. A reverse mortgage lender can foreclose on the home if you're not living in it for more than 12 consecutive months due to health care issues.
Just like a traditional mortgage, with a HECM you are borrowing money and using your home as security for the loan. You must continue to pay for property taxes, homeowner's insurance, and make repairs needed to maintain your home or the lender can foreclose on the home.
The title or the “Deed” on a reverse mortgage is just like any other property with a loan or lien against the property. The borrower holds the title, so the Deed or title is in the borrower's name.
It is worth mentioning that all HECMs are subject to the 60% utilization rule. This limits the amount any reverse mortgage borrower can take in the first year to the higher of 60% of the principal limit or mandatory obligations like an existing mortgage plus 10% of the loan amount.
If you wish to keep the home, but the amount owed on the reverse mortgage is more significant than the current value, you have the right to pay off the loan at an amount of the existing loan balance or 95% of the current market value, whichever is less.
Reverse mortgage loans typically must be repaid, usually by selling the home, when the last borrower dies. However, non-borrowing spouses may be able to stay in the home if they meet certain criteria.