A reverse mortgage is a loan for seniors age 62 and older. HECM reverse mortgage loans are insured by the Federal Housing Administration (FHA)1 and allow homeowners to convert their home equity into cash with no monthly mortgage payments.
Reverse mortgages are often considered a last-resort source of income, but they have become a great retirement planning tool for many homeowners.
The first federally-insured reverse mortgage — also known as a home equity conversion mortgage, or HECM — was introduced in 1989. These loans allow people who are 62 or older to tap a portion of their home equity without having to move.
Steven Sass, research economist at the Center for Retirement Research at Boston College, says a reverse mortgage makes sense for people who:
Some people even use a reverse mortgage to eliminate their existing mortgage and improve their monthly cash flow, says Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, or NRMLA.
“There are a lot of motivations leading into it,” Bell says. “In some cases, people may have an immediate need to pay off debt, or they may have had some unexpected expenses like a home repair or health care situation.”
The bank makes payments to the borrower throughout his or her lifetime based on a percentage of accumulated home equity. The loan balance does not have to be repaid until the borrower dies, sells the home or permanently moves out.