What are reverse mortgages?

A reverse mortgage, or Home Equity Conversion Mortgage (HECM), is a type of home loan available to homeowners 62 or older who have considerable equity (usually at least 50%) in their home. This financial tool can benefit people who need additional cash flow for other expenses, as the value of their home’s equity can be converted to cash, eliminating monthly mortgage payments. Borrowers use the equity in their home as security for the loan and can receive funds as monthly payments, a line of credit, or in a lump sum. This is called a "reverse" mortgage because, in contrast to a traditional mortgage, the lender makes the payments to the borrower.

Pros of a reverse mortgage

It may be a good option for homeowners with limited income and a lot of equity in their houses. They can use the equity to receive cash for expenses or other needs. The reverse mortgage could also be used to pay off their initial mortgage, so they will no longer have to make monthly payments.

Cons of a reverse mortgage

The principal balance will increase over time as the interest and FHA MI fees accrue. Be aware that if a borrower isn’t using the home as a primary residence, it may result in the loan needing to be paid back sooner. If the borrower vacates the property for more than 12 months for medical reasons or six months for nonmedical reasons, the balance of the loan will be due and the borrower will have to pay the loan balance.