Is a Reverse Mortgage a Good Idea?
You may have heard breathless warnings on the perils of a reverse mortgage. While these loans can come with risks and drawbacks, they can also serve as a way to provide for you and your spouse in your retirement, or offer a line of cash from an investment you’ve been paying into for decades. Learn more about whether a reverse mortgage might be a good solution for you, and speak with a real estate and consumer law attorney before committing to a reverse mortgage.
How do reverse mortgages work?
Reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs), are loans which essentially allow you to draw cash from the investment you’ve made in your home. Borrowers who are over 62 years old and have either entirely paid off their mortgage or paid off a substantial amount can receive either a lump sum, monthly payments, or open a line of credit against the equity they’ve built up in their home. In order to qualify for a reverse mortgage, you must use that home which you’re borrowing equity against as your primary residence throughout the life of the loan. As long as the borrower or the borrower’s spouse lives in the home, no payments on the loan become due. This is a change from previous versions of such loans, which gained a negative reputation in part for forcing the non-borrowing spouse out of the home or to begin making payments on the loan when the borrowing spouse would pass away or move into an assisted living facility. Now, loan payments only become due when both spouses have moved out or passed away. Typically, the home is then sold. Borrowers will never owe more on the HECM than the value of the home, and could end up pocketing the difference between the amount of the loan and the sale price, if it is higher.
How can I use reverse mortgage funds?
The funds received from a reverse mortgage or HECM can be used for any purpose, including living expenses, medical bills, paying down high-interest credit card debt, or even the purchase of a second home. Some borrowers use an HECM to pay off an existing conventional mortgage, which, depending on the amount of the mortgage still due, can both eliminate an ongoing monthly payment and provide additional funds to the borrower. An HECM for Purchase will, along with a cash lump sum, enable a borrower to purchase a new primary residence.
When isn’t a reverse mortgage a good idea?
Borrowers of reverse mortgages will need to be able to continue paying taxes and homeowner insurance in order to prevent foreclosure on the home. If this would be a challenge, then selling the home and relocating somewhere smaller might be a better solution. HECMs are available in an amount up to a certain percentage of the value of the home. If you borrow too aggressively against your home’s equity while still relatively young and healthy, you may run out of funds and be forced into selling the home earlier than you’d like. HECMs also can come with higher origination fees than some other forms of credit. Find an attorney versed in consumer law and mortgages to discuss your alternatives for managing debt and available borrowing options.
For assistance with foreclosure, bankruptcy, and other consumer law issues in Maryland, contact the skilled and dedicated Gaithersburg consumer law firm Haeger Law, LLC for a consultation, at 888-463-3520, with additional offices located in Germantown.