Retirement Advisors of America

What are Reverse Mortgages?

Older individuals who own their homes often find themselves “house rich and cash poor.” Developed to address this dilemma, a reverse mortgage provides funds --all at once or over time— to an older homeowner by drawing against the equity built up in the residence. Unlike “forward mortgages”, reverse mortgages are not repaid on a monthly basis. The total loan (including the accumulated interest) is repaid when the last surviving borrower sells the home, permanently vacates the property, or dies.
In most cases, the funds the homeowner receives may be used for any purpose. For an individual facing a retirement income shortage or an increased dependency on medical care, reducing home equity with a reverse mortgage may be preferable to selling the home to raise much-needed cash.
A reverse mortgage can have drawbacks. The closing costs normally exceed those for conventional mortgages.  Under certain circumstances, the proceeds could affect the homeowner’s eligibility for some public-assistance programs. The reduction in home equity could also reduce the homeowner’s estate.

Three Basic Types of Reverse Mortgages

• Single-purpose reverse mortgages
• Federally insured reverse mortgages
• Proprietary reverse mortgages

Compare Carefully

Comparing reverse mortgage products can be complicated. Lenders who offer HECMs can analyze the projected costs of these loans. HECMs require reverse mortgage counseling through HUD-approved agencies. The mortgage counselors at these agencies can also help homeowners decide which type of reverse mortgage is best for their circumstances.

Read more about retirement and reverse mortgages in the Compass, Issue 1, a client service publication of Retirement Advisors of America.

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