Can You Outlive a Reverse Mortgage? (2024)

Reverse mortgages are practical tools that offer retirees the option to live in their homes and benefit from home equity. People contemplating a reverse mortgage often ask what will happen if they use up all their available equity or they outlive their reverse mortgage.

Outliving vs. Using Proceeds Strategically

Because a reverse mortgage comes due when the last person on the loan dies, it isn’t possible to outlive it. However, it is possible and even likely that a borrower will outlive the availability of loan proceeds.

If borrowers run out of available funds, they can stay in the house, provided they continue to live in and maintain it and stay current on required taxes and insurance. In this sense, they will not have outlived the mortgage, but they will have outlived their ability to borrow more money from it. Whether this presents a problem for the borrower depends on how the reverse mortgage proceeds figure in their financial strategy.

Some borrowers need reverse mortgage proceeds for a specific purpose, such as making home improvements, funding a college education, or traveling. For these borrowers, who likely have alternative sources of income, using up their available equity is part of the plan and, therefore, not an issue.

Other borrowers count on reverse mortgage proceeds to supplement or provide monthly income. Careful planning can ensure that these borrowers have financial plans that account for the possibility of outliving reverse mortgage proceeds.

Reverse Mortgage Payment Options

Reverse mortgages offer multiple payment options, which allow borrowers to structure their mortgage payments to best meet their unique needs.

There are six different ways to receive reverse mortgage proceeds:

Single Lump Sum

Borrowers can receive available proceeds in a single lump sum payment. Because of the 60% utilization rule, with a variable rate, this payment will be made in two installments, the first immediately and the second after 13 months have passed. Fixed-rate reverse mortgage borrowers can only take a single lump sum payment. So, fixed-rate borrowers will only be eligible to take a percentage of the equity that would be available with a variable rate.

Line of Credit

A reverse mortgage line of credit differs from the more common home equity line of credit (HELOC) in that the unused available credit grows over time. Also, unlike the HELOC, the reverse line of credit cannot be rescinded or canceled. Opening a line of credit, but leaving it untouched, allows for more borrowing power in the future that can be used for unforeseen emergencies or to supplement living expenses when current sources of income have been tapped.

Term Reverse Mortgage Payment

Though a reverse mortgage has no specific term, with a term reverse payment, the borrower will receive equal monthly payments ending at a predetermined stop date. If the borrower lives longer than the agreed-upon term, they will outlive their available funds.

Modified Term Reverse Mortgage Payment

This is like the term reverse mortgage payment plan in that a monthly payment is sent to the borrower for a predetermined number of months. Additionally, the borrower also can access a line of credit. Even if the monthly payments end, borrowers can draw funds from any unused portion of their credit line.

Tenure Reverse Mortgage Payment

Borrowers can receive equal monthly payments for life with an adjustable interest rate. Since this is a lifetime income guarantee, there is the risk that monthly payments will be smaller when you’re younger and won’t provide adequate income to meet your financial needs. The upside is that you will likely have some funds for life. 

Modified Tenure Reverse Mortgage Payment

Monthly payments will occur during the borrower’s entire life with the option of a line of credit. This plan may have smaller monthly payments, but you can access your line of credit at any time. If you exhaust your line of credit, there is peace of mind knowing the monthly payments will continue. 

Strategic Uses for Payment Options

For borrowers to have enough proceeds to last their full lifetimes, choosing the right payment option is important. Keep in mind that no one knows how long they will live, and any strategy requires making an educated guess and including it in their financial planning.

The following questions can help you decide which options will make the most sense for you:

  • Will the reverse mortgage proceeds be used as a supplement to other income (i.e., pension, stock dividends, etc.)?
  • Do you have adequate cash flow to meet day-to-day expenses?
  • What are your outstanding liabilities?
  • What other savings and investments do you have to draw from?

There are many strategies for using reverse mortgage proceeds. Whatever reasons a borrower has for taking a reverse mortgage, it’s essential they work with a trusted financial advisor to consider options and plans.

This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.

Can You Outlive a Reverse Mortgage? (2024)

FAQs

Can You Outlive a Reverse Mortgage? ›

Though a reverse mortgage has no specific term, with a term reverse payment, the borrower will receive equal monthly payments ending at a predetermined stop date. If the borrower lives longer than the agreed-upon term, they will outlive their available funds.

Can I outlive my reverse mortgage? ›

The borrower cannot owe more than the value of the home. The lender cannot foreclose on an HECM and the borrower cannot lose the home. The borrower cannot outlive a reverse mortgage. Implications that a reverse mortgage is not a loan, but instead a government benefit or entitlement.

Can you max out a reverse mortgage? ›

With a term payment plan, you reach your loan's principal limit—the maximum that you can borrow—at the end of the term. After that, you won't be able to receive additional proceeds from your reverse mortgage.

How long can you stay in a reverse mortgage? ›

How Do Reverse Mortgages Work? Most require no repayment for as long as you live in your home. They are repaid in full when the last living borrower dies, sells the home, or permanently moves away.

What is the maximum term for a reverse mortgage? ›

Unlike traditional mortgages, there's no set term length for reverse mortgages. Like any loan, they have to be repaid eventually.

What is the 60% rule in reverse mortgage? ›

According to this rule, the initial amount that a homeowner can borrow through a reverse mortgage is limited to 60% of the home's appraised value or the maximum claim amount, whichever is less.

What happens if you run out of equity on a reverse mortgage? ›

If borrowers run out of available funds, they can stay in the house, provided they continue to live in and maintain it and stay current on required taxes and insurance. In this sense, they will not have outlived the mortgage, but they will have outlived their ability to borrow more money from it.

Can you get a 100% reverse mortgage? ›

With a traditional reverse mortgage, borrowers are not permitted to receive more than 60 percent of the total loan proceeds in the first year. With a jumbo reverse mortgage, borrowers may access 100 percent of the loan proceeds in the first year.

What is the reverse mortgage limit for 2024? ›

FHA also increased the loan limits for its Home Equity Conversion Mortgage (HECM), or reverse mortgage program, to $1,149,825 effective Jan. 1, 2024. The HECM program regulations do not allow loan limits to vary by MSA or county, so this limit applies to all mortgages regardless of location.

Can you get a lump sum from a reverse mortgage? ›

A reverse mortgage provides a borrower with choices in how they will access the funds. The choices include the following: A single lump sum payment. A regular fixed monthly payment for a term of years or for as long as at least one borrower resides in the house.

How many people have lost their homes due to a reverse mortgage? ›

A USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgage loans have failed, burdening elderly borrowers and their families and causing property values in their neighborhoods to crater.

What does Suze Orman say about reverse mortgages? ›

Taking a loan too early

The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.

What is the downside to a reverse mortgage? ›

A reverse mortgage isn't free money: The borrowing costs can be high, and you'll still need to pay for homeowners insurance and property taxes. Reverse mortgages can also complicate life for your heirs, especially if they don't want the home or the home's value isn't enough to cover what's owed.

What is the 95% rule on a reverse mortgage? ›

If the balance owed on the loan is more than what the home is worth, your heirs can sell the home for at least 95 percent of the current appraised value in order to pay off the loan.

Do people lose their homes with a reverse mortgage? ›

The loan balance grows over time, and when the borrower moves or passes away, the borrower and his estate are responsible for the repayment of the loan. However, there are still events that can lead to a borrower defaulting on the loan, which can, in turn, lead to foreclosure, resulting in you losing your home.

What happens to the house at the end of a reverse mortgage? ›

Whatever is left after paying off the reverse mortgage is your equity and you keep it. either sell the home and pay off the loan or refinance the reverse mortgage with a conventional loan and keep it in the family.

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