What Is a Reverse Mortgage and How Is it Different from a Standard Mortgage?

Reverse Mortgages Are Debt Instruments

The purpose of a reverse mortgage is to allow homeowners at least 62 years old to access the equity in their primary residences without having to sell their homes or make a monthly mortgage payment. Any equity taken from the home is a loan that must be repaid with interest when the home is sold or no longer occupied (usually upon death).

What a Reverse Mortgage Can Do

• Pay off an existing mortgage and stop monthly mortgage payments.
• Provide monthly cash flow with regular monthly payments.
• Establish a line of credit to use as needed.
• Consolidate debts such as medical bills or credit cards through a lump sum distribution.

How Much Money Can You Get from Your Home?

The loan amount is based on the ages of the borrowers, the current interest rate, and the appraised value of the home used as collateral.

Compare a Reverse Mortgage to a Standard Mortgage

Equity Requirement

• A reverse mortgage requires the home to be owned free and clear or have a substantial amount of equity.
• A standard mortgage can up to 100% of the home's value, but reverse mortgages lend much less.

Assets

• A reverse mortgage does not require any liquid assets. The only asset required is the collateral property.
• A standard mortgage may or may not require liquid asset reserves, but your chances of being approved increase with if you have them.

Credit

• With a reverse mortgage, there is no credit score requirement.
• With a standard mortgage, a minimum credit score will most likely be required and is typically 620 or better.

Income

• There is no monthly mortgage payment with a reverse mortgage, so income is not a consideration.
• A standard mortgage imposes a debt-to-income requirement of about 36-45% as a standard for loan approval. Your debt-to-income ratio is calculated by taking your total housing expense plus all debt service divided by your total gross income.

Costs

• A reverse mortgage has normal closing costs such as title and escrow fees, appraisal fee, and a credit report fee. Most reverse mortgages also come with substantial mortgage insurance premiums, which adds significantly to their costs.
• A standard mortgage has similar closing costs to a reverse mortgage, but the ongoing costs--interest, insurance, and servicing--are higher. A standard mortgage with monthly principal reduction payments will likely cost much less in interest over the life of the loan.