Considering a reverse mortgage?
- Don’t sign the loan documents unless you understand how a reverse mortgage works.
- Know your options—you may have a better choice.
- Have a serious talk with a federally approved housing counselor who specializes in reverse mortgages.
What is a reverse mortgage?
A reverse mortgage is a special type of home equity loan sold to homeowners aged 62 and older. The loan allows homeowners to access a portion of their home equity as cash. In a reverse mortgage, interest is added to the loan balance each month, and the balance grows.
The loan must be repaid when the last borrower, co-borrower or eligible spouse sells the home, moves out of the home, or dies. Most reverse mortgages today are called Home Equity Conversion Mortgages (HECMs). HECMs are federally insured. If you are interested in a reverse mortgage, first see a HECM counselor.
How does a reverse mortgage work?
After years of paying down your mortgage, you have built up equity (the amount your property is worth today minus the amount you owe on your mortgage and any home equity loan or line of credit) in your home. With a reverse mortgage, you borrow against your equity.
The loan balance grows over time. You don’t have to pay back the loan while you or an eligible spouse live in the home, but you still have to pay taxes, insurance, and maintain the home.
When both you and any eligible spouse have passed away or moved out of the home, the loan must be paid off. Most people need to sell their home to pay off the loan. But, neither you nor your heirs will have to pay back more than your home is worth.
Important questions:
Are the borrowers the only people who live in the home?
Can I afford my living expenses, property taxes, and insurance?
Do I plan to remain in my home for a long time?
Can I wait until I am older?
Consider alternatives
Wait: If you take out a reverse mortgage when you are too young, you may run out of money when you’re older and need it more. The older a borrower is, the more money he or she can borrow.
Other home equity options: A home equity loan or a home equity line of credit might be a cheaper way to borrow cash against your equity. However, these loans carry their own risks and usually have monthly payments. These also depend on your income and credit.
Refinance: By refinancing your current mortgage with a new traditional mortgage, you may be able to lower your monthly mortgage payments.
Lower your expenses: There are state and local programs that may help you defer property taxes, lower your heating costs, or save on other bills. Consider selling your home. Moving to a more affordable home may be your best option to reduce your overall expenses.
If you decide on a reverse mortgage
You can save money by borrowing less, and by borrowing gradually. For example, borrowing a smaller amount in the first year of your loan can help you pay less for mortgage insurance.
Line of credit
With a line of credit, you only pay interest on money you use. The amount of money available to you grows over time.
Monthly payout
This can be a good choice if you need additional monthly income to cover daily living expenses. You can combine a monthly payout with a line of credit.
Single disbursement
Single disbursements typically offer less money than other HECM payout options. With a single disbursement, you will pay interest on your money even when you don’t spend it.
Published on 2018-07-30 15:01:01
