A reverse mortgage is a type of consumer home loan that allows homeowners ages 62 and older to borrow against their home’s equity to receive either cash or a line of credit.
Unlike a traditional mortgage, homeowners don’t make a monthly payment; the loan is repaid when the homeowner or their heirs sell the house.
Senior homeowners often use a reverse mortgage to minimize their monthly housing costs and have access to liquid assets like cash during their retirement.
The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is a federally backed loan regulated by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development.
To qualify for an HECM you must:
With a traditional mortgage loan, a homeowner pays the lender back with interest over time in the form of monthly payments. With a reverse mortgage, the lender agrees to make payments to the homeowner based on a percentage of equity that’s been built in the home. The homeowner may receive a lump sum, monthly payments, a line of credit, or a combination of any of those methods.
Interest, fees, and other costs associated with the loan are rolled into the monthly payments, meaning the amount of the loan increases over time. The loan is repaid when the homeowner sells the home or dies, and proceeds from the sale of the home are used to pay off the debt.
Heirs or the estate are not liable for the difference if the loan is worth more than the value of the house at the time of sale. Heirs who choose to keep the property may consider paying off the reverse mortgage and refinancing to a more traditional mortgage.
As with any major decision that affects your finances and potentially your quality of life, consider the pros and cons of undertaking a reverse mortgage, and make sure you talk extensively with your lender to understand the nuances and conditions of your specific loan.
If you feel like a reverse mortgage might not be the right choice for you, there are alternatives. You could consider refinancing your existing mortgage for a better rate or a cash-out refinance. A home equity loan, like some reverse mortgages, can be paid out in a lump sum, but unlike a reverse mortgage, must be paid back on a monthly basis.
Many homeowners decide the best way to access the equity they’ve built is to sell their home and move. They may use the proceeds from the sale to downsize to a property with less maintenance and fewer taxes.
Ultimately, the key to deciding whether a reverse mortgage is a good idea for you and your situation is to consult a professional to help you understand the risks and terms associated with the loan you’re considering.
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