This article was updated on April 9, 2018, and originally published on October 9, 2016.
A reverse mortgage can be a great way for retirees to create an extra stream of income without having to make any loan payments. However, a reverse mortgage is a major financial decision, and like any major financial decision, it’s important to know exactly what you’re getting into before you commit. Here’s what you need to know about reverse mortgages and the pros and cons of this option.
What is a reverse mortgage?
The reverse mortgage, or Home Equity Conversion Mortgage (HECM), has been in existence since 1988, and is an FHA-insured program. They were created in order to give retirees an additional option to create income. The guidelines I’ll discuss throughout this article are applicable to this type of reverse mortgage.
There are also proprietary reverse mortgages, which are privately insured by the companies that offer them. While these aren’t technically subject to the same regulations and qualifications as the HECM, most companies stick to them anyway.
So, what is a reverse mortgage? Unlike a traditional mortgage where a homebuyer makes payments to a lender over time, a reverse mortgage is the exact opposite arrangement, where a lender makes payments to a homeowner in exchange for equity in the home. In other words, a bank is lending a homeowner money so it can acquire equity in a home, as opposed to a traditional mortgage where the borrower’s goal is to acquire equity over time.