A reverse mortgage, also known as a home equity conversion mortgage (HECM), is a loan — available to homeowners over the age of 62. This special type of loan allows them to borrow money based upon the value of their home equity, their age, and current interest rates. Proceeds from a reverse mortgage can be received as a lump sum, fixed monthly payments or a line of credit.
Unlike a traditional mortgage, a reverse mortgage borrower is not required to make payments on the loan – as long as the home is his or her principal residence. A reverse mortgage becomes due and payable when the homeowner moves, sells the house or passes away.
Reverse mortgages can be great for someone who owns a home with little or no debt and wants additional income. The loan proceeds can be used for any purpose, including paying bills, home maintenance, long-term care, and more.
With a reverse mortgage, the amount the homeowner owes increases over time, unlike a traditional mortgage in which the debt decreases over time as payments are made. This is because no payments are made on the reverse mortgages as long as the borrower resides in the home. Instead, interest compounds on the loan principal while the loan is outstanding. As the balance in the loan increases, the home equity decreases. Eventually the homeowner or the homeowner’s heir(s) pay the loan from the proceeds of selling the property.
Most reverse mortgages are insured by the federal government. If the amount due on the loan exceeds the sale proceeds of the home, the government reimburses the lender or the difference.
It is likely that the heirs or estate of the homeowner will receive little or no equity from the sale of the home in many cases. It is important that the homeowner let the estate executor and heirs know about the reverse mortgage and that it will have to be paid.
The executor and the heirs also should be told if the reverse mortgage is federally insured so they will know the lender cannot seek from them anything beyond the sale proceeds of the home. When the sale proceeds exceed the outstanding loan balance, the estate or the heirs receive the excess amount.
Benefits of a Reverse Mortgage
Reverse mortgages can provide a large lump sum of money or a line of credit to those who want to tap their home equity while living in the home. The loan proceeds can be used for any spending but generally are used to pay for monthly living expenses, home maintenance and repairs, or long-term care provided in the home.
The borrower’s credit worthiness doesn’t matter, because the home equity backs the loan. The borrower only needs to show that his or her income is sufficient to pay the home’s taxes and insurance and maintain the home.
A reverse mortgage is one of the only ways to access home equity without selling the property or having to make monthly payments. This makes reverse mortgages an enticing option for seniors who do not qualify for a conventional home equity loan or cannot make monthly payments.
Prospective borrowers should know that there are fees and charges for taking out a reverse mortgage, and these normally amount to 1% to 4% of the amount of the loan. Because of the amount of the fees and people generally are unfamiliar with reverse mortgages, a prospective borrower has to meet with a qualified mortgage counselor before being allowed to take out a federally insured reverse mortgage.
It is important to shop around among lenders before deciding on a reverse mortgage. The terms of reverse mortgages can differ greatly among lenders. You might end up with considerably more cash by using one lender instead of another.