Reverse Mortgage

  • A reverse mortgage, also referred to as a home equity conversion mortgage (HECM), is a loan made by a lender to a homeowner that uses the home as security or collateral. Reserved for homeowners 62 years or older, reverse mortgages are intended to help retirees with limited income use the accumulated wealth of their income to cover basic month-to-month living costs, including health care expenses and home improvements.

Benefits of a Reverse Mortgage

A reverse mortgage1 can be a powerful source of additional income. In most cases, the largest personal asset most retirees have is their home. A reverse mortgage allows them to convert some of their home equity into cash. The amount they’re eligible for depends on several factors.

With that in mind, here are some of the benefits of reverse mortgages:

  • Provides flexible disbursement options (i.e., a lump sum,2 line of credit, regular payments)
  • Proceeds are generally tax-free3
  • Generally, they don’t impact Social Security or Medicare payments4
  • You can stay in the home without making monthly mortgage payments5
  • Funds from a reverse mortgage loan can be used to pay off an existing mortgage
  • Closing costs and ongoing fees can be financed with the loan, minimizing out-of-pocket expenses
  • Heirs aren’t personally liable if payoff balance exceeds your home’s value
  • After the loan is repaid, any remaining equity belongs to you or your heirs

You aren’t required to pay back the loan until the home is sold, you move, or pass away. At that time, the loan must be paid back in full. The only other obligations you’ll have as a homeowner include keeping your home maintained, performing any necessary repairs, and staying current on property taxes and insurance premiums. Otherwise, you’ll risk default.

 

How Does a Reverse Mortgage Work?

When you own a home with a traditional mortgage, you gain equity over time as you pay off the loan. What’s equity? Home equity is the difference between what your home is worth, its appraised value, and any debt you have from mortgages against the home. For example, if you own a home that’s worth $500,000 in today’s market and owe $50,000 on your mortgage, you have home equity that’s worth $450,000. If you’re like most Americans, this amount of equity makes up much of your net worth, and as you reach retirement age, you may wish to tap into this equity to supplement your fixed income.

Although you can sell your home to tap into this equity, selling your home doesn’t make sense if you don’t want to move. And other options, like taking out an equity loan or obtaining an equity line of credit, can be challenging. A reverse mortgage is an excellent alternative for those who don’t want to put their home on the market or deal with the hassle of obtaining an equity loan or equity line of credit.

 

1This product is not available in Tennessee or Iowa.

2 The single disbursement lump sum payment option is only available with fixed interest rate mortgages.

3 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.

4 You must live in the home as your primary residence, pay property taxes, homeowner’s insurance, HOA Association dues (if applicable) and maintain the home according to FHA requirements, otherwise, the loan becomes due and payable.

5 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.

This material is not provided by, nor was it approved by the Department of Housing & Urban Development (HUD) or by the Federal Housing Administration (FHA).

Related Resources:

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  • Reverse Mortgage Qualifications

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