For a vast majority of older homeowners, their home is their largest asset. A home equity conversion mortgage (HECM)—also known as a reverse mortgage—enables owners to access home equity and turn it into cash. Payments are tax-free and can be set up as needed, as a lump sum, or in combination. The equity the owner has in the property, including any appreciation, is paid back to the owner, who still continues to live in the home and retains title.
According to RISMedia, "The Reverse mortgages amortize negatively, which is a fancy way of saying that the cash the borrower receives today gets tacked onto the balance owed at the end, including interest, which accrues deferred. The borrower or heirs can never owe more than the property is worth, and the lender cannot touch any other assets, which is a huge plus.
"As long as the borrower lives in and maintains the home, there is never any repayment obligation. Things that may trigger repayment, however, include a move, a specific maturity date, death, sale, failure to pay taxes and insurance or make repairs. The borrower may pay off the loan through sale of the property or prepay at any time without penalty."
How do I know whether I should use a reverse mortgage?
Homeowners can use the cash from reverse mortgages for a wide variety of purposes including:
- Insuring a steady monthly income
- Putting off beginning to draw Social Security
- Ending current mortgage payment
- Paying off debts
- Purchasing a second home
- Adapting a home for aging in place
While a reverse mortgage can make sense for a homeowner, there are instances when it may not be the best alternative for them. These could include:
- When there is not much equity in the home
- When a move is planned in the near future
- When other resources are available
- For buying risky, low-return investments
- Purchasing an annuity is generally not allowed
- For short-term or small financial needs
- Flipping properties
- For most mortgage default situations (there are some exceptions)
- When there is no real need to do so
Reverse mortgages can have very complicated terms, fees, and eligibility rules. It is extremely important the homeowner get expert advice from a reverse mortgage specialist. It could be that just selling one's home and moving might better fit one's needs.
It might also be helpful to read one of my previous posts, Comparing Pensions, 401Ks, and Home Equity. For more information regarding specialists who can help you better understand this complicate financial tool, please contact us.