Reverse Mortgage Basics

• When a borrower takes out a reverse mortgage, they trade some of the equity in their home to a lender for cash. Unlike a traditional mortgage where the borrower pays the lender back over time and builds equity, borrowers do not need to pay back reverse mortgages during their lifetime unless they sell the home. If a person with a reverse mortgage dies, their estate must pay back the reverse mortgage. Since funds lent do not need to be repaid immediately, reverse mortgages can serve as a way to finance large expenses such as home improvements, health care costs, and education costs without impacting fixed income. The Federal Trade Commission states that reverse mortgage payments received are not taxable and will typically not impact Social Security or Medicare benefits.
  
  

Types

• There are several types of reverse mortgages which differ in terms of how the borrower receives funds and how they can use lent funds. According to the FTC, single-purpose reverse mortgages pay the borrower once for a single, specific purpose. Home Equity Conversion Mortgages (HECMs) are government-insured reverse mortgages that can be used for any purpose, and proprietary reverse mortgages are offered by private companies with terms specified by the companies that offer them. Funds can be dispensed as a single lump sum payment, a series of monthly cash advances, or a line of credit where the borrower can decide how much money to borrow and when to borrow.
  
  

Drawbacks

• While reverse mortgages can allow retirees access to an additional source of cash, they have several drawbacks. Interest accrues on lent funds, which can compound over time since lent funds to not need to be repaid. When the mortgage is ultimately paid back, interest can sap some or all of the profit realized by the sale. If the holder of the reverse mortgage dies, the mortgage can significantly reduce the value of the estate leftto beneficiaries.
  
  

Considerations

• A reverse mortgage can be a costly option for borrowers that sell their home before they die. Selling a home and moving into a smaller home, a condominium or an apartment is an alternative method of raising a large amount of money quickly that avoids the costs associated with repaying a loan.