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Reverse mortgages can help older homeowners free up cash in retirement by borrowing against the value of their home.
It can help retirees age in place while producing a stream of income for everyday expenses.
But reverse mortgages are complex and controversial. Strict rules must be followed to avoid foreclosure, and the costs can outweigh the benefits.
If you’re considering a reverse mortgage for yourself or someone you know, it’s important to understand the advantages and disadvantages involved.
In this guide, we break down everything you need to know about how reverse mortgages work and who can benefit from this type of loan.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows property owners ages 62 and older to convert home equity into cash.
Unlike a regular mortgage, you don’t need to make monthly loan payments. Instead, your lender pays you, and your debt increases over time.
The loan is settled or repaid when you sell the home, move out or die.
According to The Brookings Institutethe average maximum claim amount on reverse mortgages is about $275,000, and the average borrower age is 73.
Types of Reverse Mortgages
There are three types of reverse mortgages.
Home Equity Conversion Mortgages
These are the most common type of reverse mortgage loan and are only available to homeowners ages 62 and older.
HECM loans are backed by the Federal Housing Administration (FHA), and must meet strict rules and lending standards.
HECM loans are non-recourse loans. This means you’ll never owe more than what your house is worth — even if its market value drops.
Private (Proprietary) Reverse Mortgages
These reverse mortgages are much riskier because they are not insured by the federal government. They’re typically designed for borrowers with higher home values.
Single-Purpose Reverse Mortgages
These loans are offered by some state and local governments and nonprofit agencies to help homeowners fund a specific need,…
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