Reverse mortgage

Also called HECM, home equity conversion mortgage

A loan for older homeowners that turns home equity into cash, with no monthly payments until the borrower moves out, sells or dies.

What it means

With a reverse mortgage, the lender pays the homeowner, as a lump sum, monthly payments, a line of credit or a mix. Interest and fees are added to the balance, so the debt grows over time while equity shrinks. The most common type is the federally insured home equity conversion mortgage, which requires borrowers to be at least 62 and to complete counseling from an approved counselor.

The loan comes due when the last borrower sells, permanently moves out or dies; the home is typically sold to repay it. Borrowers must keep living in the home and keep paying property taxes, insurance and upkeep, or the loan can go into default. HECMs are non-recourse, so heirs never owe more than the home’s value. These loans tend to suit house-rich, cash-poor retirees who plan to stay put.

Example

Suppose a 70-year-old owns a home outright and takes a reverse mortgage line of credit. She draws $1,000 a month for living costs; each draw plus accrued interest and fees adds to the loan, which is repaid when the home is eventually sold.

How it’s used

Supplementing retirement income
Paying off an existing mortgage to eliminate monthly payments
Holding a standby credit line in retirement

Strengths and weaknesses

Strengths

No required monthly loan payments
Borrower keeps title and can stay in the home
Non-recourse protection for federally insured loans

Weaknesses

High upfront costs and growing balance
Reduces equity left to heirs
Default possible if taxes, insurance or upkeep go unpaid

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.