I am thinking about a reverse mortgage. What are the risks and what should I consider?
Reverse mortgages provide income or a line of credit to homeowners who are 62 or older by allowing them to tap their home equity.
The Federal Housing Administration (FHA) insures most reverse mortgages, which are known as Home Equity Conversion Mortgages (HECMs). These mortgages do not require repayment until the homeowner dies, permanently moves, or fails to maintain the property or pay property tax. Remaining equity belongs to the borrower or the borrower's heirs.
While these loans make sense in some cases, consumers should clearly understand their responsibilities and risks.
One substantial risk arises from the ability of the consumer to access the equity in the home through large lump payments. With such large sums available, some consumers might be pressured to obtain products that are not appropriate.
Another risk involves failure to provide for taxes, insurance, and maintenance. Another concern is that the consumer might overlook the substantial fees and costs associated with this product, which are usually paid up front.
If you don't fully understand how much the loan will cost, how much can be borrowed, or the circumstances under which the loan can become due, then the risk increases that you may have agreed to a product or engaged in a transaction that is not appropriate or suitable for you.
Last Reviewed: October 2020
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