A reverse mortgage is a loan that allows seniors to take the equity out of their home and use it as cash. The big plus is that the senior still owns the home and will make no further mortgage payments.
A reverse mortgage can be a powerful tool for your retirement years, but like anything else, it has its advantages and disadvantages.
First things first though, in order to qualify for a reverse mortgage you must:
- Be at least 62 years of age or older;
- Own the property outright or have a small mortgage balance;
- Occupy the property as your principal residence;
- Not be delinquent on any federal debt; and
- Participate in a consumer information session given by an approved reverse mortgage counselor.
The type of reverse mortgage most people will be dealing with is the HECM (Home Equity Conversion Mortgage), the primary difference between a standard mortgage and a HECM is that with a standard mortgage the owner makes monthly payments and with the HECM the owner does not.
The table below will highlight the more subtle differences.
| Reverse Mortgage | Standard Mortgage | |
|---|---|---|
| Purpose | Converts existing equity into cash | Owner is buying a the property |
| Qualifications | Must be 62 or older, Equity in home, Ability to pay property taxes & insurance. |
Make monthly payment, make down payment, good credit. |
| Security | Property collateral | Property collateral |
| Value of the Loan | Equity in the property Owner’s age |
Property value Owner’s income Owner’s credit Owner’s assets |
| Loan Payout | Funds right away, and/or… monthly payment, and/or… future draws under line of credit. |
Immediately so home can be purchased. |
| Loan Repayment | No payments Balance due when owner passes on or permanently moves out |
Monthly payments or balloon. |
| Debt Changes Over Time | Rises over time as interest accrues | Declines over time from principal payments |