A reverse mortgage is a type of home loan that allows homeowners who qualify to convert a portion of the equity in their homes to cash. Homeowners often choose to use the proceeds from a reverse mortgage to:
The Home Equity Conversion Mortgage (HECM), which is insured by the federal government, was one of the first types of reverse mortgages. It is the most common type of reverse mortgage available, accounting for around 90% of the total market.
Reverse mortgages are only available to homeowners who are 62 years of age or older. Borrowers must own their homes outright or owe very little on their existing mortgages. If there is an existing mortgage, a portion of the reverse mortgage proceeds must be used to pay off that mortgage. The property securing the reverse mortgage must be the borrower’s primary residence.
One of the biggest advantages of a reverse mortgage is that the borrower does not have to make any monthly mortgage payments during the life of the loan. For many seniors, this fact alone makes a reverse mortgage more attractive than other types of loans, such as a home equity line of credit or a second mortgage. In fact, reverse mortgages don’t need to be repaid until the borrower does one of the following:
Another benefit of reverse mortgages is that they are non-recourse loans. This means that if the borrower defaults, the lender may foreclose on the borrower’s home but cannot pursue any collection efforts (including seeking a deficiency judgment) against the borrower.
Other benefits of reverse mortgages include the following:
One of the biggest disadvantages of a reverse mortgage is that once the loan becomes due and payable as a result of the borrower's death, the borrower’s heirs must:
Because the loan is non-recourse, there is no chance of a deficiency judgement.
Other disadvantages of reverse mortgages include the following:
Additional information on reverse mortgages can be found on the Department of Housing and Urban Development’s website page on Home Equity Conversion Mortgages for Seniors and the AARP’s page on Reverse Mortgages. Before taking out a reverse mortgage on your home, you may also want to consult with a trusted financial advisor or real estate attorney.