A reverse mortgage is a special type of home loan that allows borrowers who are at least 62 years old (and meet other eligibility requirements) to convert a portion of the equity in their homes into cash.
Loan proceeds can be taken as a lump-sum or monthly payment or as a line of credit. Interest is added to the loan each month, and the balance grows over time. A reverse mortgage must be repaid when the last borrower, co-borrower or “eligible spouse” sells the home, moves out or dies.
Most reverse mortgages are federally insured through the Federal Housing Authority’s Home Equity Conversion Mortgage program (HECM). The FHA — part of the U.S. Department of Housing and Urban Development (HUD) — reimburses lenders for losses tied to homes that sell for less than what is owed on the loans.
This program was created to give seniors access to an incremental, sustainable financial resource to allow them to age in place, not as an ATM machine.
Under HUD’s new rules, borrowers can draw up to 60 percent of their initial principal limit in the first year of a loan, with some exceptions. In the past, some borrowers took out as much as they could up front and later found themselves with no capacity to cover critical expenses, including property taxes and homeowner’s insurance.
HUD also requires prospective borrowers as well as any non-borrowing spouses to take part in a counseling session with a HUD-approved counselor.
New research has shown that establishing a reverse-mortgage line of credit early in retirement may mean the difference between success and failure when it comes to sticking to a financial plan.
A reverse-mortgage can give a retiree access to cash that can be used to ride out market corrections. Retirees can pay back what they draw from a line of credit when markets recover.
