For most homeowners their house is a major part of their overall financial picture. Unfortunately, for retired homeowners who may have limited sources of income, the equity in their house may seem to be one of their only potential sources of additional money for everyday living expenses and healthcare. It can be tempting to borrow from the home in order to access that equity.
A reverse mortgage or HEMC (Home Equity Conversion Mortgage) is a way for seniors age 62 or older to borrow against a portion of the value of their home. However instead of making monthly payments to a lender, the borrower receives monthly payments or one lump-sum payment. While the money borrowed will eventually have to be repaid, with interest, repayment will not come out of the homeowners’ pocket as long as they live in the house and keep up with other obligations such as paying property taxes and insurance as well as maintaining the home. The loan, with interest, will need to be repaid when the borrower or his or her heirs sell the house.
One criticism of the standard HECM is the upfront cost related to the loan. One major requirement of HECMs is that potential borrower must first talk to a HUD-approved counselor. The counselor will review the implications of receiving a reverse mortgage including repayment options and alternatives to an HECM loan. There are several alternatives to a reverse mortgage that should be reviewed before moving forward. One alternative is a second mortgage, which is a loan for a fixed amount of money, for a fixed amount of time, and at a fixed rate of interest. Another option may be a home equity line of credit, which offers a revolving line of credit from which the homeowner can borrow money, repay it over time, and then borrow again.
No matter what kind of loan you consider, experts generally recommend talking to a financial advisor and qualified housing counselor. The pros and cons of borrowing against a home in retirement depend on several factors, including a person’s income, savings and short- or long-term housing goals. For example, if you need to move into a retirement community, you will be required to either pay back the loan balance from savings or sell your home to repay the loan. Also, interest charged on a reverse mortgage adds to the total loan balance, which means your loan balance will go up over time which may wipe out the equity in your home when it is sold, leaving little or no proceeds from the sale. Experts generally say that homeowners who don’t plan to stay in a home more than five years should explore alternatives to reverse mortgage loans.
Reverse Mortgage Borrower Requirements
The following eligible property types must meet all FHA property standards and flood requirements: