If you're 62 or older and want money to pay your mortgage, supplement your income, or pay for health care expenses, you may want to consider a reverse mortgage. It allows you to convert part of your home equity into cash without having to sell your home or pay additional monthly bills. In other cases, scams attempt to force homeowners to apply for reverse mortgages with onerous interest rates or with hidden conditions that may cause the borrower to lose their property. Since the stock market is becoming volatile, but the housing market continues to rise, reverse mortgages have become a more attractive tool for older Americans who need cash to retire but want to stay in their homes.
The borrower decides that he needs the liquidity that comes with withdrawing equity from his home, so he works with a reverse mortgage advisor to find a lender and program. A reverse mortgage provides a way for older homeowners to supplement their income during retirement or pay for home renovations or other expenses, such as health care expenses. If selling your home becomes a challenge and you don't find a buyer within that 12-month time frame, the reverse mortgage can be declared overdue, Micheletti says. The idea is that even if you don't need cash right away, establishing a line of credit using a reverse mortgage on good terms can provide you with access to significant funds in the future.
The line of credit will continue to grow at the reverse mortgage interest rate, regardless of what happens to the value of the home. Keep in mind that the interest rate on reverse mortgages tends to be higher, which can also increase your costs. Reverse mortgages have gained a large following in the financial planning profession, and advisors such as Pfau recommend them as a potentially useful option in managing retirement distribution. It's best to talk to a HUD-approved counselor before committing to a reverse mortgage (and if you want to get a HECM, you'll be asked to do so).
This rule doesn't prohibit you from leaving your home to travel or come and go as you please, but if you leave the property for 12 consecutive months, the reverse mortgage loan is eligible to be canceled and payable. Unlike a regular mortgage where the homeowner makes payments to the lender, with a reverse mortgage, the lender pays the owner. As with any mortgage, there are conditions to keep your reverse mortgage in good shape, and if you don't comply with them, you could lose your home. Even with a reverse mortgage, you're still responsible for paying property taxes and not doing so could violate the terms of your loan.
There are also private or wholly-owned reverse mortgages issued by private non-bank lenders, but they are less regulated and more likely to be scams. However, in general terms, reverse mortgages must be repaid when the borrower dies, moves or sells their home.
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