Preface: Reverse mortgages permit homeowners, 62 years and older, to borrow money on home equity, without required repayment cash flow. This blog is written to help you understand when reverse mortgages can be helpful.

 

Reverse Mortgage — When it Makes Sense

 

A reverse mortgages a.k.a. a home equity conversion mortgage (HECM) is specifically designed to permit homeowners 62 years or older to draw equity from their homes. The draws on equity can be for any discretionary purpose deemed necessary on behalf of the homeowner, e.g. paying for new home improvements or additions, new car, grandchild’s education, or a bucket list vacation.

A reverse mortgage converts a qualifying home into a type of ATM machine. Repayments on the reverse mortgage draws are not required until the borrower vacates the house or dies. Reverse mortgages simply permit a draw on equity for qualifying homeowners, without the required amortized repayments typical of a traditional mortgage, or home equity line of credit interest.

What is the difference between a standard home equity line of credit and a reverse mortgage? For one, the points on a reverse mortgage are higher up-front than a line of credit, but on the other hand, interest payments commence immediately on a line of credit. For instance, if you draw on a home equity line of credit for financing a new roof, interest will begin immediately upon drawing the funds. With a reverse mortgage, you can too obtain a credit line too, up to say $200,000 and draw only $10,000 on the initial financing. The additional line of $190,000 can accessed in the future, same as a home equity line of credit; but you will not be required to make a monthly interest payment.

The main difference between a home equity line of credit and home equity conversion mortgage is the interest accrues payment each month with a line of credit; while only the payoff balance increase with a home equity conversion mortgage, e.g. if you borrow $50,000 on a line of credit, you pay interest each month and the balance remains at $50,000; with a reverse mortgage you don’t pay interest each month, but your repayment balance on the mortgage increases each month for accrued interest.

If you plan to need the financing for only a few month, a line of credit is optimal. If you need cash, despite adequate cash flow for repayment, or cash flow is subject to question, a reverse mortgage is optimal. A reverse mortgage protects the borrower from cash evaporation risks, i.e. loss of pension revenue or other sparkers of fuel lights on cash.

With a reverse mortgage you could purchase a house, with the required down payment, and have tenure, with zero payments required, for the entire occupation time of the residence. A reverse mortgage permits you to repay the balance as funds permit, or wait until vacancy of the residence to repay to the outstanding balance. A reverse mortgage permits qualifying homeowners the opportunity maintain financial security while watching the squirrels run in the yard, without worrying about cash flowing debt.

Summary: If you are a homeowner 62 years or older, and want to obtain cash flow for any purpose, either discretionary or obligation, a reverse mortgage, may work well for you. You can borrow on equity, say up to 50% of your houses value, without any repayments required, until you vacate the house, despite the fact it is a loan. Talk to a reverse mortgage expert to learn more.