A home equity conversion mortgage, or reverse mortgage, is a lending option that gives qualified homeowners the ability access the equity in their home. The benefits of a reverse mortgage include the ability to access a regular stream of funds or access to a line of credit when you need additional funds for life’s many unexpected events. However, reverse mortgages do have risks that you need to consider.
How a Reverse Mortgage Works
A reverse mortgage is designed to make payments to you from the unencumbered value of your home, which is the difference between the appraised value and the loan balance on your home. After you obtain a reverse mortgage, you will receive a lump sum or monthly payments from your lender; provided, however, you remain in the house and use it as your primary residence. If you have an existing mortgage, you may have to pay the balance of that mortgage as part of obtaining a reverse mortgage, but you will otherwise not have to make payments on the reverse mortgage until you sell the home or stop using the home as your primary residence. When you pass away, the lender will be paid upon the sale of the home.
Requirements for Obtaining a Reverse Mortgage
You must be 62 years or older to obtain a reverse mortgage. You must live in the house being mortgaged as your principal place of residence and not be in default on any debt to the federal government. In regard to the property, it must be a qualifying single-family home or condominium, and must be in good repair in accordance with minimum property standards. Before you agree to a reverse mortgage you should review the information and disclosures provided by your lender, and consult your legal and financial advisors before signing any paperwork.
Reverse Mortgage Considerations
As part of your review there are many factors to consider before obtaining a reverse mortgage. You need to remember that you remain the owner of your home, and you will continue to be responsible for upkeep, taxes, and any other related expenses. You also need to consider that with each payment you receive, the reverse loan balance due will increase and interest will accrue through the life of the reverse mortgage; however, the principal balance of the loan will not exceed the value of your home. Lastly, your reverse mortgage will come with additional fees and costs, which should be provided to you before closing.
How Reverse Mortgages Affect Your Estate
Your home will secure the reverse mortgage loan. During the administration of your estate, the sale of the home will be used to pay the lender, or if your heirs want to receive the home they will have to either pay the loan balance due or obtain a new mortgage. Unless your heirs elect to pay off the reverse mortgage loan with a new mortgage, your heirs will not be personally responsible for the reverse mortgage loan balance. Consulting with an experienced elder law attorney can help guide you through the risks and benefits of a reverse mortgage so you can determine if it is the right decision for you.