ôô

Pros and Cons of Getting a Reverse Mortgage

Get the scoop on what a reverse mortgage is, the different types, who can have one, and how much you can borrow. Plus, Laura outlines the main pros and cons you should consider before getting one.

By
Laura Adams, MBA,
January 27, 2016
Episode #435

Page 1 of 5

Pros and Cons of a Getting a Reverse MortgageRonald Reagan signed a law in 1987 that created a brand new type of loan called the Home Equity Conversion Mortgage (HECM), which is known as a reverse mortgage. Even though it’s been around for almost three decades, many people aren’t familiar with it and don’t understand how it works.

In this post, I’ll explain what a reverse mortgage is, the different types, who can have one, and how much you can borrow. Plus, I’ll give you the main pros and cons to consider before getting a reverse mortgage, which is a question that came in recently from a Money Girl podcast listener named Steve B.

Free Resource: Laura's Recommended Tools—use them to earn more, save more, and accomplish more with your money!

What Is a Reverse Mortgage?

A reverse mortgage is a home loan that allows you to convert a portion of your equity into cash without having to make any payments. To get one you must be at least 62 years old, own and occupy your home, and have some amount of equity in it.

Equity is the difference between your home’s appraised market value and how much you owe on it. For instance, let’s say your home is worth $250,000. If your mortgage balance is $100,000, then you have $150,000 ($250,000—$100,000) in equity, which equals 60% ($150,000 / $250,000 = 0.60).

The main difference between a reverse mortgage and a regular mortgage or home equity loan is that the lender pays you, instead of you paying a lender. That’s the “reverse” part.

It’s an advance on the equity you’ve already built up in your home. To qualify, you typically need at least 40% equity. And if you already have a mortgage, you also need enough equity to pay it off using the loan proceeds so the reverse mortgage is the only debt on your home.

See also: Should You Get or Pay Off a Home Mortgage?

How Is a Reverse Mortgage Paid Off?

Since you don’t have to make payments, you may be wondering how a reverse mortgage is paid off. The amount you owe grows as interest on the loan accumulates over time. And just like with a regular mortgage, you eventually have to pay it back what you borrowed plus interest.

You or your heirs will have to settle up with a reverse mortgage lender when you move out of the home or die.

You or your heirs will have to settle up with a reverse mortgage lender when you move out of the home or die—typically by selling the property.

Heirs have a minimum of six months to satisfy the debt, but they can request a 90-day extension, if needed. If a reverse mortgage isn’t paid off by that time, the lender could begin foreclosure. 

But your heirs are not legally responsible for your debt. So if the house sells for less than what you owe, the bank takes a loss, not you or your heirs. And if it sells for more than what you owe, any remaining equity belongs to you, your heirs, or your estate.   

See also: The Truth About Debt and Death

Pages

You May Also Like...

Facebook

Twitter

Pinterest