How does a reverse mortgage work?

Reverse mortgage candidates typically own their homes without any outstanding mortgage debt. However, even if their primary mortgage is fully paid off, they may not be able to borrow the entire value of their home.

The specific amount that a homeowner can borrow, referred to as the principal limit, is determined by several factors. These factors include the age of the youngest borrower or eligible non-borrowing spouse, current interest rates, the HECM mortgage limit (which was $1,089,300 in 2023), the Portfolio limit (which was $4,000,000 in 2023), and the appraised value of the home. These variables collectively contribute to calculating the maximum borrowing amount available to the homeowner.

Indeed, homeowners tend to have a higher principal limit if they are older, their property holds a greater value, and interest rates are lower. These factors contribute to an increased borrowing capacity. Furthermore, if the borrower opts for a variable-rate HECM, there is a possibility that the amount they can borrow might increase, providing them with more flexibility and options.

Variable-rate options for HECM include:

• Equal monthly payments for a fixed period of months agreed on ahead of time
• A line of credit that can be accessed until it runs out
• Web pages
• A combination of a line of credit and fixed monthly payments for as long as you live in the home
• Web pages
• A combination of a line of credit plus fixed monthly payments for a set length of time

If you choose a HECM with a fixed interest rate, you will receive a lump-sum payment in a single disbursement. It’s crucial to remember that interest on a reverse mortgage accrues monthly, and you must have adequate income to cover expenses like property taxes, homeowners insurance, and home maintenance.