In this guide, we’ll cover how a reverse mortgage works, provide tips for making wise reverse mortgage decisions, examine the best companies in the industry and answer some frequently asked questions about the process. By the time you’ve gone through this guide, you’ll not only have a clear idea of how reverse mortgages work, but should also feel confident enough to choose a lender that is the best fit for your needs.
- Make sure you know about all the costs
- Put the home in both spouses’ names
Tips for a Wise Reverse Mortgage Buyer
Before you commit to a reverse mortgage, you should know exactly what it is you’re getting. Ask lots of questions (read frequently asked questions). Going into a transaction of this magnitude unprepared or without the right knowledge could cost you money in the long run.
For starters, what exactly is a reverse mortgage? It’s a financial agreement between you and a financial institution. You agree to leverage equity in your home in exchange for funds from the financial institution and/or line of credit. Funds received may take the form of monthly payments, a lump cash sum, or irregular payments based on your line of credit activity. You can use funds from the reverse mortgage to meet your needs at your discretion, such as home repairs, medical bills, groceries, or anything you need. But before you sign the dotted line to get payments, take a look at these wise buyer tips first:
Our Reverse Mortgage Expert
Dan Hultquist is the author of the book Understanding Reverse, which is the standard reverse mortgage guidebook for consumers and lenders alike. As a Certified Reverse Mortgage Professional (CRMP), and co-chair of the Education Committee for the National Reverse Mortgage Lenders Association (NRMLA), Dan speaks nationally on the topic of Reverse Mortgages.
Dan, Director of Learning and Development at ReverseVision
Make sure you know about all the costs
A reverse mortgage is similar to a standard home loan in some ways – both have closing costs. Make sure to account for all costs like origination fees and mortgage insurance premiums. Because you’re not required to make payments on a reverse mortgage, the principal balance won’t go down during the course of the loan. However, interest will get tacked on to the outstanding balance every month, so as time goes on that balance will get higher, according to the Federal Trade Commission.
Review the fine details
It’s also important to note that many reverse mortgage interest rates are variable and could change over time depending on the market. To receive a fixed interest rate, you will have to take your loan as a lump sum. These fixed interest reverse mortgages are referred to as “closed-end” loans, because you receive funds at once, and no other draws are permitted. For this reason, the vast majority of all HECMs (Home Equity Conversion Mortgages) are now variable rate loans. This allows the borrower to only draw what is needed and leave the remaining available funds in a growing line-of-credit for future financial needs.
Another one of the requirements of the loan is the homeowner must be willing and able to pay their own property taxes and insurance. If you are not interested in making these payments, the lender may set-aside funds upfront to pay these charges on the borrower’s behalf through their expected lifetime.
Interest may not be deductible on income tax returns. For 2019, interest can be deductible under specific cases. For example, if you used a reverse mortgage to buy your home, the debt is 100% “acquisition debt” and interest on it may be deductible. However, no deduction is possible unless, or until, the borrower makes payments. While most borrowers don’t make regular payments during the entire term of the loan, there is a very large payment that occurs at the end.
Whoever you choose as your lender, discuss these costs with them so you aren’t surprised when the bill comes.
Put the home in both spouses’ names
If you’re married and decide to do a reverse mortgage, make sure to put the house in both of your names. In 2014, HUD changed these regulations to allow eligible non-borrowing spouses to defer the “due and payable” status of the loan. This means that spouses may be able to reside in the home in cases where the borrower has passed away. The biggest hoop spouses had to jump through, in such cases, was getting title to the home quickly to qualify for the deferral.
It is preferable that both spouses also be borrowers, but that is not always possible when one spouse is not of qualifying age. Fortunately, HUD now allows non-borrowing spouses under age 62 to remain on the title as a mortgagor. That does not make them a borrower on the loan, but it does help the non-borrowing spouse after the death of the borrower.
Weigh the pros and cons of features for your reverse mortgage
The borrower has the option to draw regular monthly payments (called tenure payments) from the reverse mortgage. However, in practice, this option is rarely used.
Most borrowers are now establishing a line-of-credit (LOC) instead. This way funds are there for you if you need them; you just have to ask. The benefit of the LOC is how it grows in two ways: at the natural interest rate, and when the borrower makes voluntary prepayments.
Review your options
The LOC safety net is nice, but use it judiciously because you’re borrowing funds from a financial institution and those distributions will accrue interest.
However, the line of credit is generally considered the safest, and most financially prudent, option. Not only does the available LOC grow at very nice rates, the emergency fund can be used for many financial planning purposes.
Just be sure if you opt for the line of credit to review the terms carefully.
Work with a reverse mortgage loan specialist
You’ll come across a lot of lenders as you look for a reverse mortgage, and you should be cautious of anyone who says they can provide you with additional financial services like insurance or annuities. A reverse mortgage loan is a big enough financial decision; stay focused on that for now and make sure whoever you pick to help you with that remains focused on the task at hand, too.
Experts get the job done correctly
Consider looking for a new lender if the one you’re working with keeps pitching extras like home improvement services. Their job is to help you with your reverse mortgage loan—that’s it. Make sure your reverse mortgage provider is backed by FHA (Federal Housing Authority) and offers HECMs (Home Equity Conversion Mortgages), which are backed by HUD (Department of Housing and Urban Development). These are important credentials that your lender needs to be reputable.
Get your heirs involved in the process
Your decision to take out a reverse mortgage loan could affect family you leave behind, so include them in the decision-making process as much as you can. If you (and/or your spouse) pass away and leave the home to your children or any other heir, they have the option to pay what’s left on the loan so they can keep it or sell the house. If they sell it, many reverse mortgage loans include a non-recourse clause which means heirs don’t owe more than the home’s worth when it’s sold. So, if the reverse mortgage loan was for $300,000 and it only sells for $260,000, your heirs don’t have to pay the $40,000 difference.
Our Search For The Best Reverse Mortgage Lenders
1. We searched for a comprehensive list of reverse mortgage lenders
2. We evaluated reverse mortgage lenders based on our expert guided buying criteria: multi-state licenses, clearly stated fees and superior service
3. We brought you the best reverse mortgage companies for consideration
Searching for the right home reverse mortgage lender just might be toughest part of securing the loan in the first place, so we did it for you. Some of the factors to consider include licensing, reputation in the industry, product offering and customer service. To scrutinize, we reviewed government data, analyzed consumer reviews, consulted with seniors and talked to experts in the industry.
Our search started with 15 of the largest reverse mortgage lenders and resulted in 3 recommendations. The approach we took to narrow down the top reverse mortgage lenders was as follows:
- We considered multiple lenders
We began our search with 15 well-known mortgage lenders. We looked at popular reviews websites and read the user’s comments. Companies with an average rating of less than 4 of 5 stars were disqualified. The lenders with the favorable reviews (both on the lender site and online overall) were noted favorably.
- We checked credentials
We also wanted to confirm our top choices were licensed in to do business in most states and were recognized by industry organizations. Companies that were licensed to do business can be looked up at the National Multistate Licensing System lookup. We removed companies that were not licensed to do business in most states. Be sure to check for a current license in your specific state before doing business with a reverse mortgage company. We also removed companies that were not fully accredited by the Better Business Bureau.
- We shopped for reverse mortgages & followed our buying tips
We narrowed our scope to companies that met our wise buyer criteria, meaning they clearly stated their costs, specialized in reverse mortgages, and offered excellent customer support.
We focused on companies that clearly stated their fees and didn’t charge any unnecessary fees (Look at this overview of the costs of a reverse mortgage).
We only considered those companies whose primary focus is on reverse mortgages. This singular focus will help prevent the lender, and you, from being sidetracked by other products like home insurance or annuities. Companies that weren’t backed by HUD, and those who didn’t specifically sell Home Equity Conversion Mortgages (HECMs) were removed.
We excluded companies that didn’t offer excellent support. While shopping for reverse mortgages, we contacted companies to start the reverse mortgage process, which includes phone calls, online forms and a quote. Our favorite companies had a calculator on their site to get a quick sample quote, then demonstrated customer-centered service.
Reverse Mortgage Company Reviews
After our evaluation, we selected six best reverse mortgage lenders: American Advisors Group, One Reverse Mortgage & Finance of America Reverse, Liberty Reverse Mortgage and LendingTree. Each of these companies were good picks, and also stood out in a unique way.
Finance of America Reverse Review
Great Service |
As you can probably tell by its name, Finance of America Reverse (FAR) specializes in reverse mortgages. The lender is licensed in 50 states and Puerto Rico, and is a member of the National Reverse Mortgage Lenders Association. FAR is armed with a team of reverse mortgage specialists who provide its customers with attentive support.
For anyone who’s looking for a reverse mortgage and is unfamiliar with the process, Finance of America Reverse is a good place to start. Customer reviews show the company’s agents to be not only knowledgeable but courteous and readily available. Although the company’s site lacks a quote calculator, the “Contact” page collects key contact information and includes a drop-down menu so you can specify exactly what service you need whether you’re interested in a reverse mortgage for yourself, looking into one for a loved one, etc.
Numerous customer reviews were particularly positive about FAR’s customer service, whether it was walking people through the process step-by-step, how the money they could access helped them afford home repairs, competitive pricing or just how easy the process was overall.
Read our full Finance of America Reverse review.
American Advisors Group Review
Great Closing Speed |
In addition to meeting our company expectations, AAG excels in making funds quickly available. Typical turnaround time is “30 days” from application submission to close. While not everyone will apply and get their reverse mortgage right away, many of AAG’s satisfied customers sang their praises about how fast the process was. One customer said the process from the first inquiry call until closing took about six weeks.
The AAG website doesn’t have an email address or an online menu to fill out (you’ll have to call one of the offices listed), but it does offer an online calculator so you can get a general idea of what how much of a loan you may qualify for. Just provide an estimate your home’s value, the age of the oldest homeowner and your current mortgage balance, and in seconds your loan estimate will appear in a bright red box.
American Advisors Group (AAG) puts its sole focus on reverse mortgage lending, which means all of its licensed professionals are only there to help you get most of your home’s equity. AAG continues to maintain its ranking as the number one reverse mortgage lender in the United States, based on data from the Department of Housing and Urban Development and continues to get outstanding reviews from its customer base. The most common compliment was how great of an experience customers had dealing with AAG whether it was getting walked through the process, how kind the service members were or prompt responses when they had a question.
AAG does not work in a vacuum. The lender works alongside community bankers, credit unions, retirement planners and mortgage professionals to help its customers transform home equity into supplemental retirement income. Using these resources means AAG is pulling expert advice from all over the industry, guaranteeing its customers are getting the best possible financing.
One Reverse Mortgage Review
Great Products |
In addition to excelling in other areas, One Reverse Mortgage offers a broad array of loan choices and is backed by its parent company Quicken Loans. Before you get started with One Reverse Mortgage, the company schedules a free educational session with a HUD approved counselor to discuss the process, and to find out if you qualify.
One product option is a fixed-rate Home Equity Conversion Mortgage (HECM) that offers customers the loan in one lump sum, which is ideal for people who want to pay off the remainder of a loan such as a mortgage or a vehicle.
The second option is an HECM line of credit. This allows for multiple ways for the funds to be disbursed, including monthly payments. This option tends to be the most popular reverse mortgage as customers have flexibility in how they receive their money, whether it be in monthly installments or as a line of credit where they can take what they need on an “as needed” basis. As a third option, One Reverse Mortgage offers an HECM for purchase option where customers can borrow money to purchase a new home instead of turning home equity into cash. This option is good for a customer who wants to downsize their current home or want to move closer to family members.
Along with multiple payment options, One Reverse Mortgage also boasts a user-friendly website with a reverse mortgage calculator of its own and detailed information on how the reverse mortgage process works, making it an ideal landing place for anyone who wants a reverse mortgage, but isn’t sure how to go about it.
Licensed in all 50 states, One Reverse Mortgage’s credentials speak for themselves; it’s approved by the United States Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) insures its loan program. With these approvals come strict guidelines One Reverse Mortgage has to follow to ensure its customers are protected. As the largest retail reverse mortgage lender in the U.S., One Reverse Mortgage has an A+ Rating with the Better Business Bureau.
As to be expected with a lender of One Reverse Mortgage’s stature, it too received glowing reviews from customers. Clients often spoke of how smooth the process was, were likely to recommend it others and one even expressed gratitude because her reverse mortgage helped her to be able to finish raising her 15-year-old grandson.
Read our comprehensive One Reverse Mortgage review.
Related Reverse Mortgage Resources
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Frequently Asked Questions about Reverse Mortgages
What exactly is a reverse mortgage?
Simply put, a reverse mortgage is a financial agreement where you can take the equity built up into your home and turn it into cash that you can access to help support your retirement income.
Is a reverse mortgage giving away my house to the bank?
It’s a common misconception that the homeowner is losing, or selling off, ownership of anything – including the title and equity. The homeowner is leveraging equity, but does not always lose equity. In fact, there are examples of homeowners reaping the benefits of a reverse mortgage and never losing equity.
Who is eligible for a reverse mortgage?
You must be at least 62 years old, own your home and your home must be your primary residence to be eligible for a reverse mortgage.
How do I access the funds from a reverse mortgage?
How you receive your reverse mortgage funds is up to you. You may receive the loan in a lump sum, a monthly payment or as a line of credit (or a combination of the three). You’re also able to change the disbursement plan at any time.
How does the reverse mortgage loan get paid back?
Repayment on your loan occurs when the last borrower moves out of the home or passes away. Often times, the house is sold and the money from the sale is used to pay back the loan. If any equity is left after the repayment, it can go to you or your heirs.
Why choose a reverse mortgage?
A reverse mortgage is a way to give you more financial freedom if you find yourself in need of additional funds. You won’t have to make payments on the loan as long as you live in the house and you’re still eligible for your social security and Medicare benefits.
How/where do I get a reverse mortgage?
You can work with a reverse mortgage lender, who can help you obtain this loan. Many reverse mortgages are issued as Home Equity Conversion Mortgages (HECMs), which the Federal Housing Administration insures. So, whomever you choose to handle your reverse mortgage, just make sure they are an FHA-approved lender.
Conclusion on Reverse Mortgages
If you need supplemental income during retirement, a reverse mortgage can help.
Remember to do your homework when it comes to choosing a lender. There are plenty of them out there, but ideally you want to work with someone who specializes in reverse mortgages. You’ll also want to select a company that explicitly discloses their fees and also excels in customer service.
The three lenders we recommended stood out for different reasons, but all met our criteria for best reverse mortgage companies. We drew these conclusions after talking with experts, seniors, reviewing data and listening to experts to narrow a long list of companies into a short list of recommendations. Ultimately, it’s up to you to decide what your specific needs are, and whether this important financial decision is right for you.
The Best Reverse Mortgage Companies
|Reverse Mortgage Lender||Best For|
|1||Finance of America Reverse||Great Service|
|2||American Advisors Group (AAG)||Fastest Closing|
|3||One Reverse Mortgages||Great Products|
|4||Liberty Reverse Mortgage||Great Guarantee|
|5||LendingTree||Great Online Experience|