CFPB Reverse Mortgage Booklet (Item tested)

Reverse mortgages
A discussion guide

Consumer Financial
Protection Bureau

About this discussion guide
This guide gives an overview of many key concepts of reverse
mortgages. A qualified reverse mortgage counselor can help you
learn more. 
If you’re interested in considering a reverse mortgage, but haven’t spoken with
a counselor yet, call (800) 569-4287 to find a Department of Housing and Urban
Development (HUD) approved reverse mortgage counselor today.
A detailed discussion with a counselor will give you important information
to help you decide whether a reverse mortgage is right for you. HUDapproved reverse mortgage counselors have the latest information on reverse
mortgages. In order to get the most out of your counseling session, come
prepared to talk about:
§§ Your financial needs and goals
§§ Your spouse or partner’s future housing and financial needs
§§ Other family members or dependents living with you and their future
housing needs
§§ The reasons you’re considering a reverse mortgage
§§ The alternatives to a reverse mortgage you may have considered

 Alert
Most reverse mortgages today are called Home Equity Conversion
Mortgages (HECMs). HECMs are federally insured by the Federal
Housing Administration (FHA). This guide covers typical features
and requirements for HECM reverse mortgages. Non-HECM reverse
mortgages may have different requirements and features.

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How is a reverse mortgage different from
a traditional mortgage?
Traditional mortgages
With a traditional mortgage, you usually borrow money to pay for the home at
the time of the purchase, and pay it back over time. With each payment, you
build your equity and your loan balance goes down.

Home price

Loan and
down
payment

Equity
Debt

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REVERSE MORTGAGES

Plus monthly
payment

Plus monthly
payment
Increases
equity

Reverse mortgages
With a reverse mortgage, you borrow money using your home as a guarantee
for the loan, as you would for a traditional mortgage. Unlike a traditional
mortgage, a reverse mortgage is repaid when the borrowers no longer live in
the home. Although you won’t make monthly mortgage payments, you’ll need
to continue to pay property taxes and homeowner’s insurance, and keep your
house in good condition. Because interest and fees are added to the loan
balance each month, your loan balance goes up—not down—over time. As your
loan balance increases, your home equity decreases.
Reverse mortgage borrowers must be age 62 or older. Borrowers usually use
the loan to help pay for living expenses.
Home equity

Reverse
mortgage
loan

Monthly
interest and
fees

Monthly
interest and
fees
Increases debt

Equity
Debt

 Alert
A reverse mortgage is not free money. It is a loan that you, or your heirs,
will eventually have to pay back, usually by selling your home.
Borrowed money + interest + fees each month = rising loan balance.

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How does a reverse mortgage work if I still have a
traditional mortgage?
Many people interested in a reverse mortgage still owe money on their home. If
this is your situation, you will be trading one loan for another, usually a larger one.
Some of the money you borrow with the reverse mortgage will be used to pay off
your current mortgage. If you owe a lot on your current mortgage, you may not
have much money from the reverse mortgage left over to spend on other things.
However, a reverse mortgage will free up money you have been using to make
monthly mortgage payments.

Existing
mortgage

New reverse
mortgage
loan

Monthly
interest and
fees

Monthly
interest and
fees

Equity
Debt

 Alert
If you still owe a lot of money on your existing mortgage, you might not
have enough equity to pay off your current mortgage with a reverse
mortgage—which means you may not be able to get a reverse mortgage.

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REVERSE MORTGAGES

What happens if I want to sell my home?
You might decide to sell your home while you have a reverse mortgage. You
may want to downsize, or move closer to family.
With a reverse mortgage, the money you borrow and the interest and fees
added to the loan balance shrink your equity. However, if home prices rise, you
might gain back some equity. It’s hard to predict how much, if any, equity will
be left when you sell your home.

What if my reverse mortgage balance is less than my home value?
So long as your reverse mortgage loan balance is less than the value of your
home, this works just like selling your house when you have a traditional mortgage:
Reverse
mortgage
loan

Monthly
interest and
fees

Monthly
interest and
fees

Sell home
to pay loan
and keep
difference

Equity
Debt

 Alert
Home price increases are not guaranteed! During the housing crisis
between 2007 and 2012, home prices fell more than 25% overall, and
more than 50% in some areas.

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What happens if I want to sell my home? (continued)
What if I owe more on my reverse mortgage than my home is worth?
If your loan balance is more than the value of your home, you may not have to pay
the difference. When you sell your home for the appraised fair market value, the
remaining balance of the loan is paid by mortgage insurance.

Reverse
mortgage
loan

Interest and
fees are added
to the loan
each month

Your loan
balance is
more than the
value of your
home

Sell home for
appraised
value to pay
part of the
loan
Remaining
balance is
paid for by
mortgage
insurance

Equity
Debt

 Caution
If you don’t’ meet your responsibilities with a reverse mortgage (see
pages 16-18), your loan could become due for repayment. In this case,
you will usually have to sell your home for the lesser of the loan balance
or 95% of its appraised value.

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REVERSE MORTGAGES

What happens to my home when I pass away?
When the last remaining
borrower passes away, the
loan has to be repaid. Most
heirs will repay the loan by
selling the home.

How does it work when
the loan balance is less
than the home value?
Your heirs will use the loan
proceeds to repay the loan
and keep the difference.

How does it work when
the loan balance is more
than the home value?
Your heirs won’t have to
pay more than 95% of
the appraised value. The
remaining balance of the
loan is covered by mortgage
insurance.

Inherit home
worth more
than the loan
balance

Sell home
to pay loan
and keep
difference

Inherit home
worth less
than loan
balance

Sell home
for 95% of
appraised
value

Equity
Debt

Equity
Debt

 Caution
If you plan to leave your home to heirs, talk to them about their repayment
options. If your heirs want to keep the home, they will have to repay either
the full loan balance or 95% of the home’s appraised value—whichever is less.

7

How much can I borrow?
Your “principal limit”
Your borrowing limit is called the "principal limit." It takes into account your age,
the interest rate on your loan, and the value of your home. In general, loans
with older borrowers, higher-priced homes, and lower interest rates will have
higher principal limits than loans with younger borrowers, lower-priced homes,
and higher interest rates.

Lower borrowing limit
§§ Younger borrowers
§§ Higher interest rates
§§ Lower-valued homes

Higher borrowing limit
§§ Older borrowers
§§ Lower interest rates
§§ Higher-valued homes

Principal limit
Equity
Debt

 Whose age is used if I am married or have a co-borrower?
If you are married or co-borrowing with another person, the principal
limit is based on the age of the youngest co-borrower, spouse, or
eligible non-borrowing spouse.

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REVERSE MORTGAGES

What is a credit line growth feature?
Growing credit line
With the credit line growth feature, the less credit you use today, the more
you'll have available for the future. Whatever you don't use in your credit line
will keep growing, allowing you to borrow up to a maximum amount stated
in your mortgage. The amount of credit line growth varies depending on the
interest rate and mortgage insurance premium. (A credit line growth feature
does not apply to the lump sum payment option).

Example 1: If you max out
your credit upfront, you
won't be able to borrow
more in the future

Example 2: Leaving credit available means your
borrowing limit will actually grow over time,
helping you keep pace with rising expenses

9

How much will it cost?
Reverse mortgages can be expensive. Like traditional mortgage loans, you
will owe not just the money you borrow, but also interest and fees. Unlike
traditional mortgage loans, the amount you owe grows over time.

Upfront costs
Like traditional mortgages, borrowers typically pay some one-time upfront
costs at the beginning of the loan. While you can pay these costs out of pocket,
you can typically choose to pay for them using your loan proceeds. This means
that you don’t have to bring money to the closing. But it’ll reduce the total
amount of money you get to use for other things.

Principal limit

Equity
Money you'll receive
Upfront costs

Upfront costs include origination fees paid to the lender, real estate closing
costs paid to third-party professionals, and the initial mortgage insurance
premium paid to the FHA.

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Ongoing costs
Ongoing costs include interest, mortgage insurance premiums and servicing
fees. These costs are charged each month and are calculated as a percentage of
your outstanding loan balance. The larger your loan balance, and the longer you
keep your loan, the more you will pay in ongoing costs.
Ongoing costs are added
to your loan balance each
month.

Month 1 Month 2 Month 3 Month 4 Month 5

These costs compound,
meaning each month you
are charged interest on the
interest and fees that were
added to your previous
month’s loan balance.
Loan balance
Interest + fees

 Tips and questions

§§ The best way to keep your ongoing costs low is to borrow only as
much money as you need.
§§ What is mortgage insurance and why do you have to pay for it?
If you or your heirs sell your home to pay off a reverse mortgage,
your loan balance may be more than your home is worth. Mortgage
insurance covers the remaining loan balance so you won’t owe more
than your home is worth. It also protects you in case your lender has
financial difficulty and can’t make payouts to you as agreed. Borrowers
pay for mortgage insurance as a requirement of an HECM loan.

11

How do I receive my money?
You have three main options for receiving your money:

 Line of credit (adjustable interest rate)
§§ Higher mortgage insurance costs if you withdraw more than 60% in the
first year.
§§ Lower cost: pay interest and fees only on the money you’re ready to use.
§§ Credit line growth feature*: unused credit continues to grow.
§§ Can be combined with monthly payout.

 Monthly payout (adjustable interest rate)
§§ Higher mortgage insurance costs if you withdraw more than 60% in the
first year
§§ Get a set monthly payout to supplement income.
§§ Two choices: Term (fixed monthly payouts for a set number of years) or
Tenure (fixed monthly payouts as long as you maintain the reverse mortgage).
§§ Lower cost: pay interest and fees only on the money you’ve drawn so far.
§§ Credit line growth feature* is factored into monthly payout amount.
§§ Can be combined with a line of credit.

 Lump sum (fixed interest rate)
§§ Withdraw all available funds at once. Amount available is usually lower
compared to other options.
§§ Higher cost: pay interest and fees on entire loan amount.
§§ No credit line growth feature*.
§§ Higher risk for younger borrowers of outliving their loan funds.
*See page 9 for information on the credit line growth feature.
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How can a reverse mortgage affect the people living
with me?
Do you live with a spouse
or partner?
It is a good idea to make
your spouse or partner a
co-borrower.
When your spouse or partner
is a co-borrower, you are both
responsible for the loan and
both receive benefits from
the reverse mortgage.

You and a coborrower may live
in your home with a
reverse mortgage

When you pass away
or move, the coborrower may remain
in the home and
continue to receive
money from the
reverse mortgage

§§ When your spouse or
partner is a co-borrower,
they will be able to remain
in the home after you no
longer live in the home.
§§ A co-borrower will also
continue to receive benefits
from the reverse mortgage
after you no longer live in
the home.

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How can a reverse mortgage affect the people living with
me? (continued)
What if your spouse or partner isn’t a co-borrower on the reverse
mortgage?
§§ Only co-borrowers and some non-borrowing spouses have the right to remain in
the home after you pass away.
§§ If your spouse or registered domestic partner (depending on your state) is not on
the reverse mortgage, they may be able to remain in the home after you pass away
if they qualify under HUD’s rules.
§§ From the time you get a reverse mortgage, your non-borrowing spouse must continue living with you to remain in the home after you pass away.
§§ If you get married after you already have a reverse mortgage, your new spouse
can’t stay in the home when you pass away.
§§ Non-borrowing spouses do not receive money from a reverse mortgage after the
borrower dies.

Anyone may live with
you in your home with
a reverse mortgage

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When you die, a nonborrowing spouse
may remain in the
home under certain
conditions, but will not
receive money from
the reverse mortgage

Non-eligible
spouses will need
to make other living
arrangements after
you die

Do you live with someone age 62 or older who is not your spouse
or partner?
§§ If this person wishes to remain in the home after you move or pass away,
consider making them a co-borrower.
§§ If the person you live with isn’t a co-borrower, he or she will have to move
out when you move out or die, unless they are an heir and can either pay the
reverse mortgage debt or 95% of the appraised value with cash or a new loan.
§§ Make plans for the people you live with for where they will move after the last
borrower no longer lives in the home.

Anyone can live in
your home with you
when you have a
reverse mortgage

When the last co-borrower
or eligible spouse no
longer lives in the home,
the loan comes due for
repayment and others
need to move out

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 What are my responsibilities?
There are several requirements that HECM reverse mortgage borrowers must
follow. If you don’t meet these requirements, you could lose your home to
foreclosure.

1. Property taxes and homeowner's insurance must be paid on time.
With a reverse mortgage, the way you pay your property taxes and
homeowner’s insurance could change. A lender will do a financial assessment
to determine your options for paying your property taxes and homeowner’s
insurance. Your options may include:
§§ You make direct payments to the insurance company and tax authority.
§§ You make direct payment, but have some of your loan set aside to help you
with these payments.
§§ The lender takes care of it for you using your loan proceeds in a set-aside
account.

 What is a "set-aside"?
A “set-aside” is a portion of your loan that is reserved to pay some repairs,
taxes, homeowners insurance, and fees. Set-asides help make sure you’ll
have the funds to make these payments in the future.

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2. Your home must be kept in good repair.
You must make repairs as needed to keep your home well maintained. With a
reverse mortgage, your lender will let you know what repairs you may need to
make. Which situation applies to you?
Your current mortgage

Reverse mortgage

I routinely maintain my home and make
repairs, hiring professionals when
necessary.

That’s good. This is required with a
reverse mortgage.

My roof is missing a couple of shingles,
and my water heater is getting old.

These may not be emergency issues, but
they may require attention before they
become worse and cause damage to
your home.

My home is in good condition, but my
yard has become overgrown.

You will need to keep your entire
property maintained. A neglected yard
can eventually damage property.

My home needs major repairs.

You may be required to make repairs
as a condition of getting a reverse
mortgage. Your lender may withhold
some of your loan proceeds to make the
required repairs.

 Caution
Beware of scams! Beware of contractors who approach you about
getting a reverse mortgage to pay for repairs to your home. Learn all
your options. Do not let yourself be pressured into getting a reverse
mortgage.

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3. Your home must be your primary residence.
Every calendar year you will be required to certify in writing that you occupied
your home as your primary residence. Which situation applies to you?
Your current mortgage

Reverse mortgage

I live in my home year-round.

You are already meeting this
requirement.

I split my time between my home and
another location.

OK, but you can only get a reverse
mortgage on the home where you spend
the majority of the year. Let your lender
know if you are going to be away for
more than two months.

 Caution
You can lose your home to foreclosure if you have a reverse mortgage and:
§§ You are absent from your home for a majority of a year for a nonmedical reason, or
§§ You are absent from your home more than twelve consecutive months
for healthcare purposes.

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Have you explored other borrowing and housing options?
Homeowners interested in a reverse mortgage may find that other loans or
housing choices are a better fit for their financial situation or personal needs.
Be sure to look at all of your borrowing and housing options before making
your final decision. Consider alternatives to a reverse mortgage, such as:
Waiting
If you take out a reverse mortgage when you are too young, you may run out
of money when you’re older and more likely to have less income and higher
health care bills.
Other home equity options
A home equity loan or a home equity line of credit might be a cheaper way to
borrow cash against your equity. However, these loans carry their own risks and
usually have monthly payments. Qualifying for these loans also depends on
your income and credit.
Refinancing
By refinancing your current mortgage with a new traditional mortgage, you may be
able to lower your monthly mortgage payments. Pay attention to the term of your
new mortgage as it can affect your retirement plan. For example, taking on a new
30-year mortgage when you are nearing retirement can become a hardship later.
Consider choosing a shorter-term mortgage, such as 10 or 15 years.
Downsizing
Consider selling your home. Moving to a more affordable home may be your
best option to reduce your overall expenses.
Lowering your expenses
There are state and local programs that may provide assistance with utilities
and fuel payments as well as home repairs. Many localities also have programs
to help with property taxes: check with your county or town tax office.
Information about these and other benefit programs is available through the
Administration for Community Living, www.acl.gov.

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About the Consumer Financial
Protection Bureau
The Consumer Financial Protection Bureau, or the CFPB, is
focused on making markets for consumer financial products
and services work for consumers — whether they are applying
for a mortgage, choosing among credit cards, or using any
number of other consumer financial products. We empower
consumers to take more control over their financial lives.
The CFPB's Office for Older Americans is the only federal
office dedicated exclusively to the financial health of
Americans age 62 and over. Along with other agencies, the
Office works to support sound financial decision-making and
to prevent financial exploitation of older adults.

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Last updated June 2017