A reverse mortgage, also called a Home Equity Conversion Mortgage, or HECM, is a loan that enables you to convert part of your home’s equity into cash, receiving it as either a lump sum or as monthly payments. In the USA, reverse mortgages are only available to homeowners who are 62 years or older.
How It Works
As you might expect, a reverse mortgage works the opposite way a regular mortgage does. With a reverse mortgage, the lender pays you, the homeowner, in exchange for partial equity in your house. The lender is essentially buying your house from you the same way you paid off your mortgage the first time.
To take out a reverse mortgage, the homeowner must not have any additional liens against the home. The borrowers credit is considered irrelevant when taking out a reverse mortgage, as the home serves as collateral. A borrower will keep receiving payments and will not be required to pay back the loan until the home is sold or the borrower dies. If the borrower does die, then the home’s heir will need to begin making payments back to the lender in order to keep the house. If they cannot afford to buyback the home, it will become possessed by the bank and likely sold.
The amount of your monthly receivables is determined by the initial mortgage amount, the rate at which interest accrues, the length of the loan, the rate of the home price appreciation, as well as the borrower’s age. All of this is taken into account so that a borrow will never receive more than the value of the home over the life of the loan.
Reverse mortgages also come with a lot of fees attached, including origination costs, closing costs, mortgage insurance, and servicing fees. While in a reverse mortgage, it can also be difficult to sell the home, rent it out, move out, or add another person to the title.
Why Take Out a Reverse Mortgage?
Reverse mortgages can help retirees who are running out of funds make it through their retirement comfortably. However, if you’ve maintained good credit, a more traditional mortgage, such as a home equity loan, may be a better option for you.
If you’re considering taking out a reverse mortgage, make sure your lender lays out the details of the loan before you sign. Getting a second opinion from a family accountant is also a good idea.