- Access home equity. You are able to access your home equity, likely a substantial portion of your wealth, without having to leave your home.
- Remain in your home. As long as you keep your loan in good standing, you may remain in the home for as long as you live.
- Defer payments. You can defer payments until you leave the home or pass away.
- Flexibility. The Home Equity Conversion Mortgage (HECM) program is extremely flexible in terms of withdrawing the proceeds of your loan.
- Line of credit. HECM’s credit line option can be incredibly attractive, as an unused credit line will grow over time.
- Pay off debt. It can be useful for paying off a mortgage or expensive consumer debt.
- Limit on what you owe. Neither you nor your heirs will ever owe more than the home is worth.
The key risks are:
- Moving becomes difficult. A senior may eventually need to move out of the home, even if this is not his or her preference. This often occurs due to health reasons when the senior must enter a nursing home, assisted living facility, or to move in with a family member who will become a caregiver. Other times, it is because the senior can no longer afford to pay for taxes, insurance, and basic maintenance. By that time, the senior may have no home equity left to finance the move. This risk is especially severe for borrowers in their 60s.
- Postponing the inevitable. For many seniors who have limited savings and retirement funds, using a HECM simply postpones the inevitable – needing to leave the home – while eating away valuable home equity.
- Ignoring better options. Some seniors would be better served using a HELOC or a traditional home loan for short term cash needs.
- Bad investments. Those who take a large lump sum are at risk of reinvesting the money at a lesser return than the interest on the HECM. These seniors are also a more likely target for fraud and various scams.
- Problems for family. Anyone who lives in a senior’s home that is not named on a reverse loan will need to either move or pay off the loan when the borrower dies or moves out of the residence. Many borrowers and their family members do not understand this risk and do not adequately prepare. In fact, this very issue has made the news when a non-borrowing spouse was forced to move following the death of a borrowing spouse.
That said, there are very attractive features to a HECM, especially if the borrower chooses the line of credit option to withdraw his or her funds. In an article in the Journal of Financial Planning, financial planners John Salter, Shawn Pfeiffer, and Harold Evensky identify the following benefits to taking out a reverse mortgage, most of which come down to flexibility:
- Credit line. The borrower has full control over use of the line of credit, deciding when, and even if, it gets used.
- Flexibility. The borrower may choose to pay back the loan at any time to preserve home equity or never pay back the loan if the senior remains in the home.
- Tax benefits. The proceeds of a reverse mortgage are tax-free, and if the borrower chooses to repay the loan, the interest could be tax deductible.
- More powering powers. A credit line grows over time at the interest rate on the loan. This means that your borrowing power grows over time.
- Non-recourse. HECMs are non-recourse loans. Though the balance of a reverse mortgage can rise above the value of the home, you can never owe more than your home is worth.
Additionally, a credit line from a HECM reverse mortgage cannot be canceled, which can happen with a home equity line of credit and did happen during the last financial crisis.