Reverse mortgages have been available for decades, but they are only now gaining popularity as more homeowners become aware of the option. If you own your home with some equity and you are at least 62 years old, a reverse mortgage may be an option to supplement retirement income, pay off a remaining mortgage balance, or increase your savings.
A reverse mortgage or Home Equity Conversion Mortgage (HECM) is a type of loan only available to seniors with equity in their home. Unlike a standard home loan with monthly payments, a reverse home loan gives you cash with no payments to make. You will not need to pay down the balance of the loan every month as with a standard loan, but this does mean the loan balance will steadily go up with interest charges.
A reverse mortgage is only repaid when the borrower sells the house, passes away, or permanently moves out. It is impossible to owe more than the home is worth, which means heirs will not be left with the debt.
Before choosing a reverse mortgage, there are several questions to ask yourself:
- Do you want to pass the home to heirs? Heirs will not be liable for the debt of the reverse mortgage, but they will need to pay the balance of the loan (up to the home's market value) if they want to keep the home. This usually means taking out a new mortgage.
- Do you have enough equity? You cannot borrow against all of the equity in your home, only a percentage. Make sure you have enough equity to make a reverse mortgage worth your while.
- Are you willing to sell your home and downsize? The cheapest way to access your home equity is selling the home and moving into a smaller home. Reverse mortgages, meanwhile, let you remain in the same home.
- Can you afford upkeep, taxes, and insurance? You will need to maintain the home and keep the homeowners insurance and property taxes current, otherwise the lender can foreclose.
- No monthly mortgage payments necessary
- Loan proceeds can be used for anything, including improving cash flow in retirement, paying for medical expenses, paying off debt, or traveling
- Heirs are not obligated to repay the mortgage
- Proceeds usually do not affect Medicare or Social Security benefits
- Flexible payment options with the choice to receive loan proceeds as a single lump sum, monthly payments, a line of credit, or a combination of these options
- Closing costs and fees tend to be high compared to a standard mortgage
- It can be hard to pass on the home to heirs, who will need to take out a new loan to keep the home
- Property taxes, homeowners insurance, and home maintenance must be kept up as a condition of the loan
Who Offers Reverse Mortgages?
There are a few ways to get a reverse loan. The most uncommon are private reverse mortgages offered by companies and single-purpose reverse mortgages usually offered by state and local governments or non-profits.
Most people choose the Home Equity Conversion Mortgage program. These mortgages are insured by the FHA and available through approved lenders. Until recently, Wells Fargo and Bank of America dominated the reverse mortgage landscape, but today lenders like Quicken Loans, American Advisors Group, One Reverse Mortgage, and Home Point Financial Corp. now lead the pack. Many local mortgage brokers and smaller lenders also offer reverse mortgages.
When to Use a Reverse Mortgage
There are many situations in which a reverse mortgage can be a good choice. This type of loan is often recommended for seniors who:
- Can afford the expense of property taxes, insurance, and home maintenance
- Want to remain in the home
- Want to access equity to supplement retirement savings or income, boost savings, pay for medical care, or get access to an emergency line of credit, and/or
- Want to eliminate an existing mortgage balance or debt.