As a real estate agent in Kansas City, I hear the term “reverse mortgage” most often in three situations:
- older homeowners who want to stay in the house and free up cash
- sellers whose homes already have a reverse mortgage
- adult children who inherit a property with one
A reverse mortgage lets homeowners 62 and older borrow against their home equity without making monthly principal and interest payments. The homeowner remains on the title and continues living in the home. The loan is usually repaid when the last borrower sells or moves out permanently.
This article focuses on the most common type, the FHA-insured Home Equity Conversion Mortgage (HECM). Private “proprietary” reverse mortgages have different rules. HECMs are also non-recourse, which means the lender can only collect from the sale of the home, never from the borrower’s or heirs’ other assets, even if the balance grows larger than the home’s value. Borrowers must complete reverse mortgage counseling with a HUD-approved counselor before applying.
How Much Can You Borrow With a Reverse Mortgage?
The most you can borrow is called the principal limit. It’s based on the age of the youngest borrower, the expected interest rate, and the appraised value of the home. Older borrowers and lower rates mean a higher percentage of the home’s value. For example, a borrower in their early 70s might qualify for roughly 40 percent at current rates, and no one can borrow the full value of the home.
If the appraisal is lower than you expected, you’ll be able to borrow less. In some cases, FHA requires a second appraisal and uses the lower of the two.
Before you receive any of the money from your reverse mortgage, the lender will deduct closing costs and any amounts needed to pay off liens or existing mortgages you still owe on the home. What’s left is yours to use. You can take your money as one lump sum, monthly payments, a line of credit, or a mix of those.
You don’t make monthly payments on the loan itself, but you remain responsible for property taxes, homeowners insurance, maintenance, and any HOA fees. You must continue to use the home as your primary residence. A long hospital or care facility stay can make the loan due and payable.
What Does a Reverse Mortgage Cost?
Reverse mortgages carry upfront costs, so ask for a full breakdown before you commit. These typically include an upfront mortgage insurance premium (MIP) equal to 2 percent of the home’s value for HECMs, an origination fee, and standard closing costs.
There are also ongoing costs. Interest and ongoing mortgage insurance are added to your loan balance every month. You don’t pay these out of pocket, but they increase what you owe. Rates and fees can change, so confirm current figures before you decide.
How Fast Does the Balance Grow?
Because nothing is paid down, the balance keeps climbing, and the growth accelerates the longer the loan lasts. For example, if a borrower takes $150,000 at a 6.5 percent effective rate (note rate plus the 0.5 percent annual MIP), the amount owed grows to about $300,000 in roughly 11 years. Even though the balance doubles, the borrower received only the original $150,000.
Home values change too. Long-term national appreciation has averaged 3 to 4 percent a year, though local markets vary. If home values rise faster than the loan balance, equity can remain. If values stay flat or fall, the balance can catch up to or pass the home’s value. The same can happen when a large amount is taken early and the loan lasts many years. In either case, the non-recourse protection still applies.
What Are the Risks of a Reverse Mortgage?
Reverse mortgages can help, but they carry real risks. The lender can call the loan due and begin foreclosure on the home if the borrower:
- Stops paying property taxes or homeowners insurance
- Doesn’t keep up with maintenance
- Stops living in the home as a primary residence
Many homeowners turn to a reverse mortgage to put their equity to work. Once that money is spent, though, keeping up with taxes, insurance, and repairs can become a real strain. It’s a common problem. A 2019 Government Accountability Office review found that defaults rose from 2 percent of terminations in 2014 to 18 percent in 2018, mostly from occupancy problems or unpaid property charges. source: Government Accountability Office review
Newer financial assessment rules, and the option to set aside funds for taxes and insurance, were added to reduce these defaults. They don’t remove the obligation to stay current.
Once a loan is called due, the borrower or heirs generally have limited time to pay it off or sell the home. If the problem is unpaid taxes or insurance, the servicer may also offer a repayment plan. Before foreclosure can proceed, servicers must follow specific notice and loss-mitigation steps, meaning they have to try to work out alternatives first.
Can You Sell a House With a Reverse Mortgage?
Yes. The loan is paid off from the sale proceeds at closing, just like any other mortgage. Buyers can’t take over the reverse mortgage, so they’ll need their own financing. If the sale price is more than the balance, the rest goes to the seller or the estate.
If the balance is higher than the home’s value, the lender can’t collect the difference from the seller or the estate. Instead, an appraisal sets the home’s value, and the loan can be settled for 95 percent of that appraised value. FHA insurance covers the rest.
What Happens to a Reverse Mortgage When the Homeowner Dies?
The loan becomes due and payable, but heirs are not personally responsible for any amount beyond the home’s value. Heirs generally have two options:
- Sell the home. If the home is worth more than the loan, heirs can sell it, pay off the balance, and keep the rest. If the balance is higher than the home’s value, they can satisfy the loan by selling for at least 95 percent of the appraised value, and FHA insurance covers the shortfall.
- Keep the home. They can pay off the lesser of the full balance or 95 percent of the appraised value, usually by refinancing or using other funds.
An eligible non-borrowing spouse may be able to stay in the home after the borrower dies. Eligibility rules are specific, so ask the servicer early.
For heirs, the practical steps are:
- Request a current payoff statement from the servicer.
- Ask the servicer about an appraisal if the home may be worth less than the balance.
- Decide whether to sell or keep the home.
- Work within the lender’s timelines. Heirs typically have about 30 days to respond to the due-and-payable notice. They then get additional time to sell or pay off the loan, and extensions are possible when a sale or refinance is underway.
Early, clear communication with the servicer keeps the process moving.
Frequently Asked Questions
Do heirs owe more than the home is worth?
No. HECMs are non-recourse, so the lender can’t collect more than the home is worth. Heirs can sell for at least 95 percent of the appraised value or keep the home by paying the lesser of the balance or 95 percent of the appraised value.
Can the buyer of my home take over a reverse mortgage?
No. The loan must be paid off at closing.
Do I still own my home with a reverse mortgage?
Yes. You keep the title as long as you meet the loan requirements.
What happens if I stop paying property taxes?
The lender can call the loan due and begin foreclosure. Setting aside funds for taxes and insurance can help prevent this.
Talk to Someone Who Knows the Local Market
If you’re selling a home with a reverse mortgage or dealing with an inherited property in the Kansas City area, I can help with the real estate side. Call or text me at 913-800-7653.
Note: This article is for general information only. I am a licensed real estate agent, not a financial planner, mortgage broker, or attorney. Consult appropriate professionals for guidance based on your situation.
Justin Rollheiser – Real Estate Agent
REALTOR®
Keller Williams Realty Diamond Partners, Inc.
13671 S Mur-Len St, Olathe, KS 66062
Cell 913-800-7653
Office 913-322-7500
www.JustinRollheiser.com
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