What is a Reverse Mortgage?
A reverse mortgage is a loan for homeowners, typically 62 and older, allowing them to convert home equity into cash. Unlike traditional mortgages where homeowners make payments, with a reverse mortgage, the lender pays the homeowner. The loan amount and interest are repaid when the last borrower leaves the home.
How is a reverse mortgage different from a traditional mortgage?
Traditional mortgages involve the homeowner paying the lender, decreasing the loan balance. Reverse mortgages involve the lender paying the homeowner, and the loan balance grows over time.
The Home Equity Conversion Mortgage (HECM)
The most common reverse mortgage is the federally insured Home Equity Conversion Mortgage (HECM), available through FHA-approved lenders. This insurance provides protections like the non-recourse feature, limiting repayment to the home's value.
HECM eligibility and requirements
To qualify for an HECM, you must be at least 62, the home must be your primary residence and meet FHA standards, and you must own the home outright or have significant equity. Counseling with a HUD-approved expert and continued payment of property taxes and insurance are also required.
Payment options for HECM funds
HECM funds can be received in various ways, including a lump sum, monthly payments for tenure or a set term, or a line of credit. A combination of a line of credit and payments is also an option.
Pros and cons of reverse mortgages
Carefully consider the benefits and drawbacks of a reverse mortgage.
Comparison: Reverse Mortgage vs. Other Options
| Feature | Reverse Mortgage | Home Equity Line of Credit (HELOC) | Cash-Out Refinance |
|---|---|---|---|
| Age Requirement | Must be 62+ for HECM | No age requirement | No age requirement |
| Monthly Payments | No required monthly payments | Requires monthly payments | Requires new, possibly higher, monthly payments |
| Debt Accumulation | Loan balance grows over time | Loan balance increases with draws | Starts at a new, higher balance |
| Repayment Event | Borrower dies, sells, or moves out permanently | Begins after draw period ends | Starts immediately |
| Inheritance Impact | Reduces home equity and inheritance | Reduces home equity | Reduces home equity |
| Counseling Required? | Yes, for HECMs | No | No |
| Primary Residence | Must be primary residence | Does not have to be primary residence | Must be primary residence |
Alternatives to a reverse mortgage for seniors
Alternatives to reverse mortgages for accessing home equity include Home Equity Loans, HELOCs, Cash-Out Refinancing, downsizing, and proprietary reverse mortgages. Each has different payment structures and requirements.
Potential risks and considerations
Risks include increased debt and reduced inheritance due to compounding interest. You are still responsible for property taxes, insurance, and maintenance, and failure to pay can lead to foreclosure. The non-recourse feature protects against owing more than the home's value. Heirs will need to settle the loan. A financial assessment is required. Reverse mortgages may affect eligibility for needs-based programs. Be cautious of scams and use a HUD-approved lender.
For more detailed information, consult the Consumer Financial Protection Bureau's reverse mortgage resources.
Is a reverse mortgage right for you?
The suitability of a reverse mortgage depends on your financial situation and goals. It can provide income for those who are house-rich but cash-poor, allowing them to remain in their homes. However, it may not be suitable if you plan to move soon or want to leave a large inheritance. Mandatory counseling for HECMs is essential to understand all aspects and alternatives.
