The Difference with a Reverse Mortgage and a HEA

Key takeaways

• The Federal Housing Authority provides most reverse mortgages through approved lenders. To qualify for a reverse mortgage, you must be at least 62 years old and have substantial equity in your home (usually at least 50%).

• The reverse mortgage is payable upon the borrower’s death, when the borrower moves out of their home or when the borrower sells the home.

• The home equity agreement (HEA) has no age requirement. It provides cash up front in exchange for a portion of your home’s future value. How much you can receive depends on the amount of equity you have established in your home.

Receiving funds: How it works

If you own a home, you’re likely living in your largest asset. When you need money, you may be able to put that asset to use through a reverse mortgage or home equity agreement (HEA).

Both allow homeowners to tap into their home’s equity. However, the reverse mortgage is structured completely differently from a HEA. The former is like a loan with interest, while the latter provides cash up front in exchange for a portion of your home’s future value.

To decide whether a reverse mortgage or home equity agreement is better for your financial situation, you might consider how much money you need, your age, your life expectancy and your home’s current value.

The reverse mortgage

The reverse mortgage is unique among home equity financing options. Rather than make payments to a bank like you do for a regular mortgage, a reverse mortgage is exactly what it sounds like: the bank pays you instead. Reverse mortgages are regulated by the Federal Housing Authority (FHA) and provided by approved lenders.

A reverse mortgage uses your home equity to pay off your existing mortgage (if you have one). After doing so, you will receive any remaining proceeds from the new loan (the reverse mortgage). If you already own your home outright, you’ll receive all of the proceeds.

Requirements

To be eligible for a reverse mortgage, you must meet two criteria: (1) you’re at least 62 years old and (2) you have substantial equity in your home (for most lenders, it’s at least 50%). Subtract the total outstanding mortgage amount from your home’s current value to determine your home equity.

Other requirements include:

• Ability to pay associated fees: Origination fee, standard closing costs, loan servicing fees, interest, monthly mortgage insurance premiums, as well as an upfront mortgage insurance premium

• Completion of a federally approved counseling session, which costs anywhere from $125 to $200 depending on the counseling agency, and takes about 90 minutes

• Collateral protection: Borrower must remain current on property taxes, homeowners’ insurance and homeowners’ association fees (if applicable)

Receiving reverse mortgage payments

The most common type of reverse mortgage is the home equity conversion mortgage (HECM). The HECM allows homeowners to borrow a maximum amount depending on the:

• Youngest borrower’s age
• Loan’s interest rate
• The lesser of the home’s appraised value or the FHA’s maximum claim amount 

Once the lender approves you for a reverse mortgage, you can receive the funds in several ways. These include:

1. Lump sum
2. Annuity payments (equal monthly installments)
3. Term payments (term set by the borrower)
4. Line of credit
5. Annuity payments with a line of credit
6. Term payments plus a line of credit

Repaying the reverse mortgage

You must repay the reverse mortgage upon the occurrence of certain events: when the borrower dies, moves out of the home for at least one year (including for medical reasons) or sells the home – or fails to pay property taxes or insurance, or does not maintain the home.

There are no requirements for monthly payments because the loan balance will not come due until one of these events take place. However, some people do make monthly payments, as it reduces interest that accrues on the mortgage. If you do not make monthly payments, the lender will add interest to the total loan balance.

Like other types of home equity loans, your home serves as collateral. Although you’ll keep the title to your home, you’ll only receive proceeds from the sale if they exceed the amount you owe to the lender.

The home equity agreement

A home equity agreement (HEA) also provides cash based on your home equity. But unlike a reverse mortgage, an HEA is available to all homeowners regardless of age.

With an HEA, you receive funds – based on how much home equity you have built up – in a lump sum up front in exchange for a percentage of your home’s future value. The amount of obtainable funds varies by provider but can be as high as $600,000, depending on the homeowner’s equity and financial profile. 

With a HEA, you do not have to make any monthly debt or interest payments. You end the HEA agreement by selling your home or buying back your equity from the provider at any time during the term of the agreement (usually 10 years).

Which is best for you?

The reverse mortgage and the HEA provide access to home equity. However, each has particular requirements.

Reverse Mortgage

• Must be at least 62 years old
• Must have significant home equity (at least 50%)
• Adjustable or fixed-rate interest
• Monthly payments
• Variety of payout options
• Homeowner retains title

Home Equity Agreement

• No age requirement
• Minimum equity requirement: 20% to 30%, depending on the provider 
• No monthly payments
• Lump-sum payout
• Homeowner retains title

The HEA provides several benefits over a reverse mortgage, including lower qualification thresholds. Find out if an HEA might work for you today.