A reverse mortgage is a type of home equity loan that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. Reverse mortgages are typically catered towards older homeowners, but they have also become a great retirement planning tool for many homeowners. This type of mortgage does not need to be repaid until the borrower passes away, sells the home, or permanently moves out.

There are three kinds of reverse mortgages:

  1. Single purpose reverse mortgages – loans offered by some state and local government agencies, and nonprofits
  2. Proprietary reverse mortgages – private loans
  3. Federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs) – a type of Federal Housing Administration (FHA) insured reverse mortgage.

    How do reverse mortgages work?

    With a regular mortgage, the borrower makes monthly payments to the lender, but with a reverse mortgage, the lender makes payments to the borrower.

    There are several factors that are accounted for that determines the amount of funds you can receive from a reverse mortgage:

    • Age
    • Value of home
    • Interest rate
    • Lesser of appraised value or the Federal Housing Administration’s HECM mortgage limit of $636,150
     

    Who would benefit from a reverse mortgage?

    A reverse mortgage makes senses for individuals who:

    • Are age 62 and older who own a home or have small mortgages.
    • Don’t plan to move.
    • Can afford the cost of maintaining their home.
    • Want to access the equity in their home to supplement their income or have money available for a rainy day.

    Should you get a reverse mortgage?

    Pros:

    • Does not require monthly payments from the borrower.
    • Proceeds can be used to pay off debt or settle unexpected expenses.
    • The money can pay off the existing mortgage.
    • Funds can improve monthly cash flow.

    Cons:

    • Fees and other closing costs can be high.
    • Borrower must maintain the house and pay property taxes and homeowners insurance.
    • A reverse mortgage can complicate one’s wish to keep the house in the family.

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