July 6, 2017 by HECM Pro
Like any financial product, the reverse mortgage isn’t inherently good or bad. It’s simply a financial tool. It’s “goodness” or “badness” is determined by how it’s used. If used for the wrong purpose, then yes, it’s probably bad.
But if it’s used for the right purpose, the reverse mortgage can do a ton of good. In fact, it can be literally life changing in a very positive way – as many seniors across America can attest.
What is a Reverse Mortgage?
A reverse mortgage is simply a type of home loan that enables seniors 62 or older to convert a portion of their home’s value into cash without taking on a payment or giving up ownership of the home. No mortgage payment is required and the loan does not need to be repaid until all borrowers permanently leave the home, whether through relocating, moving into a nursing home, or passing away.
The most popular reverse mortgage in America today is the FHA-insured and regulated home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). The following are some notable features of the HECM:
- No payment or payback is required as long as at least one borrower is living in the home and paying required property charges.
- You remain the owner of the home and are free to will it to your heirs. Your heirs will inherit any remaining equity in the home.
- The HECM is a non-recourse loan. This means you, your estate, and your heirs will never have to repay any more than the value of the home – regardless of how much you borrow.
- The HECM is insured and regulated by FHA.
- Proceeds are not subject to income taxes and do not impact Social Security or Medicare benefits.
- Proceeds can be taken as a lump sum payout, credit line, monthly income, or some combination of all of these.
Your obligations under the HECM program are simply to pay the required property charges and live in the home as your primary residence. As long as you do these things, no payment or payback is required.
When Are Reverse Mortgages Bad?
The reverse mortgage is a fantastic program, but it’s not the perfect solution for everybody. So, when are reverse mortgages bad? The following are a few scenarios where it may not make sense:
- You want to leave the most home equity possible to your heirs. The reverse mortgage is designed to convert home equity into cash, which means the equity position in your home will likely decrease. If you want to leave the most home equity possible to your heirs, then avoid the reverse mortgage.
- You will sell and move in the near future. You’re not locked into your home when you have a reverse mortgage, but it’s better suited for homeowners who don’t plan to move anytime soon. A reverse mortgage usually doesn’t make sense as a short-term solution because of closing costs and the effort that goes into qualifying. If you know you’ll sell in the next year or two, it’s better to wait and do a reverse mortgage on the new home.
- You have a person living in your home who can’t care for themselves. If you have a disabled person living in your home, a reverse mortgage could force them out if something happens to you. If you want them to live in the home after you die, be sure to provide a way for the mortgage balance to be paid upon your passing. The reverse mortgage has to be repaid in full once the last borrower permanently leaves the home. If it isn’t repaid, HUD requires the lender to sell the home to recoup the mortgage balance.
- You plan to marry soon. A new spouse is not automatically “grandfathered” into the protections and benefits of an existing HECM. If you pass away and the reverse mortgage is only under your name, your spouse will have to either refinance or pay off the loan to remain in the home. If you’re getting married soon, it’s best to wait until after the wedding to get a reverse mortgage.
So, are reverse mortgages bad? Definitely not – as long as they’re used as intended. If tapping into your equity can enable you to live better and more financially secure in retirement, then a reverse mortgage could be a fantastic option.