Reverse Mortgage Pros and Cons: What to Know About a HECM

A reverse mortgage lets older homeowners turn part of their home equity into cash while continuing to live in the home, with repayment generally deferred until the last borrower moves out, sells or dies. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration and requires a youngest borrower aged 62 or older and counseling from a HUD-approved counselor. It can ease cash flow in retirement, but the balance grows over time, you must keep up with taxes, insurance and upkeep, and it affects what your heirs receive.

How a HECM works

With a traditional mortgage, you borrow a lump sum and pay it down over time. A reverse mortgage works the other way. You borrow against your equity, and instead of making regular mortgage payments, interest and fees are added to the loan balance over time. The amount you owe goes up, and your equity goes down.

You keep the title to your home. The loan generally comes due when the last borrower no longer lives in the home as a principal residence, whether because of a sale, a permanent move or death. Most often, the loan is repaid by selling the home.

How much you may be able to borrow depends on factors such as the age of the youngest borrower or eligible non-borrowing spouse, interest rates and the home's value. HECMs are available only through FHA-approved lenders. Eligibility varies by borrower and property.

Counseling comes first

Before you can get a HECM, you must meet with a HUD-approved reverse mortgage counselor. The counselor is independent of the lender. The session covers how the loan works, its costs, your obligations, how it may affect your family and whether alternatives might fit better.

Treat counseling as a real planning step, not a formality. Bring your questions, and consider inviting family members who may be affected. You can find a HUD-approved counselor through HUD or the Consumer Financial Protection Bureau.

The pros

• Access to equity while you stay in your home. A HECM can turn home equity into usable funds without requiring you to sell or move.
• Deferred repayment. As long as you meet the loan terms, repayment is generally deferred until the loan comes due, which can relieve pressure on a fixed income.
• Flexible ways to receive funds. Depending on the loan, options may include a lump sum, a line of credit, regular disbursements or a combination.
• Federal insurance protections. Because a HECM is FHA-insured, when the home is sold to repay the loan, you or your heirs generally do not owe more than the home is worth.
• You keep ownership. The home stays in your name.
• Some protections for a spouse. An eligible non-borrowing spouse may be able to remain in the home after the borrower dies, if HUD's requirements are met.

The cons

• The balance grows. Interest and fees are added each month, so what you owe rises over time and your equity shrinks. A reverse mortgage is a loan, not free money.
• Upfront and ongoing costs. HECMs carry closing costs, mortgage insurance and servicing charges. Ask for a full written breakdown and compare it with other ways to raise funds.
• Less to leave behind. The more you borrow and the longer the loan runs, the less equity remains for you or your heirs.
• The loan can become due early. If you fall behind on property taxes or insurance, fail to maintain the home or move out, the loan may become due sooner than you expected.
• Moving can be complicated. If you leave for an extended stay in a health care facility, it can affect the loan.
• Possible effects on benefits. Some needs-based benefits can be affected by how you receive and hold the funds. Ask a benefits counselor before you decide.

Your ongoing obligations

Taking out a HECM does not end your responsibilities as a homeowner. To keep the loan in good standing, you must:

• Live in the home as your principal residence.
• Pay property taxes on time.
• Keep homeowners insurance in place, plus any required flood insurance.
• Pay any homeowners association dues or similar charges.
• Keep the home in good repair.

Not meeting these obligations can lead to default and foreclosure. If you have trouble paying taxes or insurance, contact your servicer and a HUD-approved housing counselor right away. Acting quickly gives you more options.

What happens to your heirs

When the last borrower dies, and there is no co-borrower or eligible non-borrowing spouse remaining in the home, the loan becomes due. Your heirs then have choices:

• Keep the home by repaying the loan balance, often by getting their own financing.
• Sell the home. If the home is worth more than the balance, they can sell, repay the loan and keep the difference.
• Sell for less than the balance. If the balance is higher than the home's value, HUD rules generally allow the loan to be satisfied through a sale for a set share of the appraised value, with the FHA insurance covering the rest.
• Hand the home back to the lender instead of selling it themselves.

Heirs are expected to act within a limited window after the servicer sends notice that the loan is due, and extensions may be available while they arrange a sale or financing. Talking with your family now about your plans, and about estate planning, can make this process much easier for them.

Who can live in the home

A HECM does not change who can live with you while you are in the home. After you die or move out permanently, a co-borrower can stay. An eligible non-borrowing spouse who was married to you when you took out the loan and meets HUD's requirements may be able to stay as well. Other family members who are not borrowers can stay only if the loan is repaid.

Watch for pressure and scams

Be cautious of anyone who pressures you to take a reverse mortgage to pay for a home repair, an investment or another product. The Department of Veterans Affairs does not offer reverse mortgages, so be wary of ads that suggest otherwise. For most reverse mortgages, you also have a short right to cancel after closing by notifying the lender in writing.

Alternatives to consider

Before you decide, compare a HECM with other paths, such as downsizing, a home equity loan or HELOC, state or local property tax relief programs, or help from family. A counselor can help you weigh which approach fits your goals. Because a reverse mortgage involves your estate, a conversation with an attorney or a tax professional may also be worthwhile.

Frequently asked questions

Next steps

• Reverse Mortgage

Sources

• HUD: FHA Reverse Mortgage for Seniors (HECM)
• CFPB: What is a reverse mortgage?
• CFPB: Reverse mortgage loans
• CFPB: With a reverse mortgage loan, can my heirs keep or sell my home after I die?
• CFPB: Does having a reverse mortgage impact who can live in my home?