What Is a Reverse Mortgage?

May 7th 2016

Having a retirement plan is important, and reverse mortgages can play a significant role in it. They can provide regular income to subsidize existing savings, but do your research and exercise diligence before signing up for one.

Understanding Reverse Mortgages

A reverse mortgage, more properly known as a home equity conversion mortgage, is similar to a standard home equity loan because it converts that equity into cash. The major difference is that homeowners do not need to make monthly payments on the reverse mortgage as they would on a standard home equity loan. Instead, the loan is paid off when the home is sold.

Who is Eligible?

Reverse mortgages often come with additional restrictions that do not apply to home equity loans. They often require the borrower to be a certain age. For example, the U.S Department of Housing and Urban Development requires the homeowner to be at least 62 years old. A borrower is typically required to use the home as a primary residence. The house must also either be entirely paid off or have substantial equity to qualify. Federally backed reverse mortgages additionally require homeowners to be up-to-date on their taxes and other federal loans.

Benefits and Drawbacks

Reverse mortgages can be a useful source of retirement income. Payments can be made to the homeowner on a regular basis, providing an income for those who may not have cash savings for retirement.

The primary drawback of reverse mortgages is that they often do not leave much inheritance for the heirs. The loan needs to be paid off, and that can mean that the heirs cannot keep the house. If they choose to keep the house and pay off the loan using the rest of the estate or other cash, that can drain savings earmarked for college funds or other purposes. Some reverse mortgages also have high upfront fees at signing, and the homeowner is still responsible for all maintenance and insurance costs.

Conclusion

Most people have heard of reverse mortgages, but there is a great deal of conflicting information available about them. Understanding both the benefits and potential problems with reverse mortgages is essential to making the right choice regarding whether to apply for one.

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