How Does a Reverse Mortgage Work?

A reverse mortgage is a special type of loan allowing homeowners aged 62 and above to access equity locked in their property without needing to make any repayments as long as they continue living there. Senior citizens can convert the value of their home into an income stream that can be used for various expenses such as medical bills, home improvements, or simply supplement retirement funds.

It’s important to note, however, that the loan must be repaid after death, either by selling the home or refinancing it with another form of financing. Understanding how these mortgages work and what types are available will help you determine if this might be a viable financial solution for you or your loved ones going forward.

How Does It Work?

When reverse mortgages are taken out, borrowers receive a lump sum or monthly payments from the lender that is backed by the equity in their home. The reverse mortgage is paid off when the borrower passes away, sells the home, or moves out.

The amount that can be borrowed depends on the reverse mortgage solutions available and is generally determined by a few factors. These include:

  • Age of the youngest borrower or eligible non-borrowing spouse.
  • Current interest rates.
  • Maximum reverse mortgage limit established by the Federal Housing Administration (FHA) ($970,800 in 2022).
  • Value of the home.

Typically, homeowners are likely to receive a higher principal limit. The older they are, the more the property is worth and the lower the interest rate. The amount might also increase if they have a variable-rate reverse mortgage rather than a fixed-rate reverse mortgage.

There are several reverse mortgage solutions available, each of which provides a different payment option. These options include:

  • Equal monthly payments: These payments are given to the borrower as long as at least one borrower lives in the home as their primary residence.
  • Equal monthly payments for a fixed period: This reverse mortgage solution allows borrowers to receive monthly payments for a specified number of months.
  • Equal line of credit: With this reverse mortgage solution, borrowers can access the reverse mortgage funds until it runs out.
  • A combination of a line of credit and fixed monthly payments: This reverse mortgage solution provides borrowers with a line of credit as well as monthly payments for as long as they remain in the home.

Depending on the reverse mortgage solution chosen, a reverse mortgage can offer significant benefits to homeowners. It’s important to understand, though, that reverse mortgages aren’t right for every situation, so be sure to talk to a reverse mortgage specialist about your individual needs and options.

What is the Reverse Mortgage limit?

The reverse mortgage limit is set by the Federal Housing Administration (FHA) and is based on the home’s appraised value. Generally, reverse mortgage borrowers can access up to 60% of their home’s value.

As of January 1st, 2023, the reverse mortgage limit is set at $1,089,300. This means that even if the home’s value is higher than $1,089,300, reverse mortgage borrowers will still only be able to access up to $1,089,300.

Is a Reverse Mortgage Right for You?

Ultimately, reverse mortgages may help borrowers stay in their homes and maintain a comfortable lifestyle. It is important to consider all reverse mortgage solutions carefully and discuss your options with a reverse mortgage specialist before making any decisions.

Reverse mortgages can be a great way to supplement retirement financially. Still, it is also important to understand that reverse mortgages will need to be repaid after death either by selling the home or refinancing it with another form of financing. Making an informed decision today can help you determine if reverse mortgages are a viable financial solution for you or your loved ones going forward.