The HECM – also known as a reverse mortgage – has some key advantages, including no monthly mortgage payments to make, which may offer greater peace of mind in retirement. As long as you fulfill your obligations as the homeowner, i.e., live in the home, pay your property taxes and insurance, maintain your property and meet all other loan terms, repayment doesn’t have to occur until after you are no longer in the home. Of course, there are important tradeoffs to understand, including the fact that over time, the HECM balance grows and is payable once you move out, sell the home, or otherwise do not meet loan terms. However, because the loan is FHA insured, you are guaranteed that you’ll never need to repay more than the home is worth, no matter how long you live in the home.
If you’re considering a reverse mortgage, it’s important to educate yourself on the product; therefore, we’ve outlined the various reverse mortgage pros and cons to better help you decide whether this product is right for you.
- Monthly mortgage payments are not required
- Borrowers keep the title and own their home just like a traditional mortgage
- Loan proceeds are tax-free* and can be distributed as a lump sum, credit line, steady stream of monthly payments or combination
- Unused portion of credit line is guaranteed to increase over time
- No prepayment penalty
- Under certain terms, monthly payments from the line of credit continue no matter how long you live even when loan balance is more than house value
- Every HECM requires pre-counseling by an independent, certified expert to make sure you are a good fit for the loan, and vice versa
- FHA insurance guarantees that no matter what happens in the housing market, repayment is capped at the home’s final value, protecting heirs and the estate
- Your heirs inherit the house, just as they would with any other mortgage, and they can decide what to do to repay the loan balance
- A HECM can be used to buy a home and not have a monthly mortgage payment (taxes insurance, HOA, and property upkeep required).
- It is not a loan of last resort and is often used as a wealth planning tool to maximize other investments and Social Security*
Cons or Drawbacks to Consider
- Eligibility requirements
- If you have to move out for any reason, your loan becomes due and payable
- Value of estate inheritance may decrease over time as proceeds are spent and interest accrues and the loan balance increases
- Reverse mortgages are not well understood by many people
- Can be expensive if you do not compare lenders
Recent studies evaluating the effectiveness of using a home equity strategy retirement supports that the best use of the HECM is not a loan of last resort and is often used as a wealth planning tool to maximize other investments and Social Security. If you or a loved one is a homeowner over the age of 62, a reverse mortgage could be the key to unlocking financial security in retirement. However, a reverse mortgage may not be right for you if you fall into the following categories:
- Are under the age of 62 or not named on the title of the home
- Do not intend to remain in your home for at least 3-5 years
- Are unable to afford property taxes, insurance, home maintenance and any applicable HOA fees
- Have someone (such as a special need child) who will want or need to live in the home after the loan ends, unless there are funds set aside to pay off the loan balance.
- Are on Medicaid or receive Supplemental Security Income (SSI), reverse mortgage proceeds may affect your benefits.
Call toll-free (855) 523-4326 to speak with a reverse mortgage expert and receive a no-obligation quote.
*Consult a financial advisor and appropriate government agencies for any effect on taxes or government benefits.