Is a reverse mortgage right for you?

If you are considering a reverse mortgage, you should be sure you understand how these loans work and how one would fit in with your overall financial plan.

First, you need to make sure you are eligible for a reverse mortgage. You must be a homeowner, age 62 or older, want to borrow the equity from your principal residence and have a low outstanding mortgage balance or no current mortgage at all.

That's only the beginning. There's a lot more to learn about Home Equity Conversion Mortgages (HECMs) and reverse mortgages.

Reverse mortgage considerations

Once you have determined if you qualify for a reverse mortgage, you should think about your long-term plans. Borrowers must pay closing costs and mortgage lender fees for a reverse mortgage. These costs can be wrapped into the loan balance and will be repaid when you stop using your home as your principal residence. Because these costs can be substantial, a reverse mortgage usually doesn't makes sense for short-term use.

Among the important considerations for deciding whether a reverse mortgage will work for your situation is whether or not you plan to stay in your home. If you think you may downsize or more to a different home in the next few years, a reverse mortgage may not be the right loan product for you, since high upfront costs fees cannot be recovered.

If you do plan to move, a reverse mortgage might still be an option. If, for example, you sell your current home and want to downsize into another, you can take the profits from the first home to buy the second. You can then take out a reverse mortgage on the new home at the same settlement for the home purchase and therefore gain access to the cash you used to buy the home. The FHA's HECM for Purchases program could be a means to get a more suitable home and have no monthly payments.

Reverse mortgages and your estate

Many homeowners are concerned about the repayment of a reverse mortgage. The loan must be repaid when you sell your home or stop living in it as your principal residence. You or your heirs are not responsible for any remaining balance above the price of your home if you sell it for less than the loan amount. If you have equity in the home after the loan is repaid, that belongs to you or your heirs.

HSH's comprehensive "Guide to HECMs and reverse mortgages" is a great place to get a solid working understanding of how these complex products work and can work for your benefit. Of course, consulting a HUD-approved reverse mortgage counselor is the best way to get all of your concerns addressed so you can make an informed decision.