The past ten years have not been easy for the American economy. The stock market has been exceptionally volatile, housing prices have fallen, and the unemployment rate has more than doubled. While few consumers were left untouched, many retirees and pre-retirees were left questioning their hopes of a comfortable retirement.
Fortunately, one financial product has renewed the hopes of many consumers. If you are one of the many seniors who are questioning their financial stability during retirement, you might have come across a unique loan product known as a reverse mortgage. But what are reverse mortgages exactly? Are these loans the answer to a secure retirement?
What Are Reverse Mortgages?
Reverse mortgages are loans that help senior homeowners, ages 62 and older, convert a portion of their home equity into cash. These loans are also commonly called Home Equity Conversion Mortgages, or HECMs. HECMs are reverse mortgage products backed by the Federal Housing Administration (FHA). While proprietary reverse mortgages are available, the great majority of seniors choose HECMs.
To qualify for an HECM, seniors must own their home and have a substantial amount of equity in their home. Reverse mortgages can only be taken on primary residences, and the home must meet FHA’s minimum property requirements. The amount seniors are eligible to borrow will depend on their property value, equity, age, and interest rate. However, borrowers are limited to a maximum claim amount of $625,500.
How Do Reverse Mortgages Help Seniors?
After asking what are reverse mortgages, most seniors are curious as to how these loans can benefit them. With a reverse mortgage, seniors receive a portion of their home equity as cash. This cash is typically used to repay the borrower’s existing mortgage loan and add to their retirement savings.
Unlike other loan products, reverse mortgages only become due once the borrower dies, sells the home, or stops using the home as their primary residence. Until that time, borrowers will not be asked to make a single payment. The only requirement is that seniors maintain the condition of their home, keep homeowners insurance, and pay their property taxes. As long as these requirements are met, borrowers can stay in their home payment free for as long as they wish. This helps many seniors increase their cash flow and enjoy the retirement they deserve.
