Is a Reverse Mortgage for You?

Is a Reverse Mortgage for You?

For some homeowners who have substantial equity in their home, a reverse mortgage may be a good option. Also referred to as a Home Equity Conversion Mortgage (HECM), the home equity is paid back to the homeowner in a lump sum or monthly payments. The equity amortizes negatively; however, the homeowners retains title and can continue to live in the home for the remainder of their lives. Unused equity can be passed on to their heirs.

Here are some benefits and pitfalls of a reverse mortgage:

Benefits: A HECM can be used to refinance and help cover monthly living expenses, for the purchase of a new home, or for a line of credit to be tapped only when needed. There is tremendous flexibility in how the equity can be used. A homeowner cannot outlive the payments or be foreclosed on by the bank. The lender places a lien on the property but as long as the borrower lives in and maintains the home, there is never any repayment obligation, even if all the equity is used up.

Pitfalls: The upfront fees are high to establish a HECM and only make sense if the homeowner intends to stay in the home for many years. The events that trigger repayment include: a move to another home as a principal residence, permanent absence (12 months or more), a pre-specified maturity date, death of the last surviving homeowner, sale of the property, and failure to pay taxes and insurance or make repairs.