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What is a reverse mortgage and who is it best for?

On Behalf of | Jan 21, 2025 | Real Estate Transactions | 0 comments

A reverse mortgage allows homeowners 62 or older to borrow against their home equity. They receive the money through a lump sum, a line of credit or monthly payments, but they do not have to repay the loan as long as they live in the house.

This type of loan can be a significant source of income for older adults who need money for living expenses. However, it is not a good option for everyone.

If you are considering a reverse mortgage, here is what you need to know before making a decision.

How does a reverse mortgage work?

A reverse mortgage lets you borrow against your home equity without making monthly mortgage payments.

As mentioned, you do not have to repay the loan as long as you are living in the house. However, the loan will gain interest and fees each month as the balance increases.

The loan becomes due when you pass away, move out or sell the house. The proceeds from the sale will be used to pay back the loan.

What are the requirements for a reverse mortgage?

The most common type of reverse mortgage is the home equity conversion mortgage (HECM). For the HECM, applicants must be at least 62 years old. It also imposes the following requirements:

  • The home must be your principal residence
  • You must own the home outright or have a low balance
  • You can pay for other home expenses
  • You do not have any federal debt
  • Your home must meet the required property standards
  • You must receive counseling

Note that meeting all these requirements does not automatically mean you qualify. The lender will still need to assess your application to determine eligibility.

Is a reverse mortgage right for you?

The primary advantage of a reverse mortgage is that it can give you a stream of income. This may be particularly beneficial if you have no other sources of funds.

However, getting a reverse mortgage also means putting up your home as collateral. Your heirs may lose the home if they cannot buy it back after you pass away. Furthermore, it may make you ineligible for certain income-based benefits, such as Medicaid.

There are many pros and cons to a reverse mortgage. If you are unsure how to proceed, consulting a real estate attorney may be the best first step. Legal guidance can help you understand this type of loan and make the best decision for your future.

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