A Home Equity Conversion Mortgage (HECM) allows homeowners to convert a portion of the equity in their home into cash or increase their loan balance over time. A reverse mortgage, as the name indicates, is the opposite of a forward mortgage, where loans shrink as payments build equity.
Forward/Regular mortgage
Why should you consider getting a reverse mortgage?
With a reverse mortgage, a homeowner is not required to make monthly payments to the lender, and the loan balance grows. That's incredibly helpful during retirement when earnings are reduced. Moreover, a HECM also comes with a line of credit that grows over time. Timely distributions from a HECM can be used to delay social security or coordinate withdrawals from a 401K. The money can also be used to:
Fund day-to-day expenses
Make home improvements
Cover medical expenses
Pay off high-interest debt
The amount that can be borrowed depends on the borrower's age, the value of the home, and the interest rate. To qualify for a reverse mortgage
the primary borrower must be 62yrs of age
have a primary residence that is paid off or have a low mortgage balance
attend mandatory counseling before application
be a U.S. citizen or permanent resident
The loan is settled by the estate when the homeowner dies, or if they sell the home, or no longer use it as their primary residence. Heirs always have the option of repurchasing the home at 95% of the appraised value or the remaining loan balance, whichever is lower.