Home Equity Conversion Mortgage Pros and Cons

by Katie Burns, J.D., Attorney, Housing Counselor, & HUD Certified Reverse Mortgage Counselor

Homeowners age 62 and older qualify for a reverse mortgage. A reverse mortgage is a loan that converts existing home equity into tax-free cash. Unlike a regular or ‘forward’ mortgage, however, there are no monthly payments required. In fact, depending on the type of payment plan selected, a reverse mortgage may actually pay you for as long as you live in the home. Other payment plan options include a lump sum at closing, or a line of credit that would actually grow over time. If you are considering home repairs or improvements, hoping to supplement your retirement income, or want to pay off an existing mortgage, this type of loan may be a viable option.

Although there are several types of reverse mortgage loans, only the Home Equity Conversion Mortgage (HECM) is insured by the Federal Housing Administration. The FHA insures each of these loans for up to $625,500, making it a fairly safe loan program. In the event that the loan ends up underwater, meaning that the amount owed exceeds the value of the home, FHA will cover the difference when the loan is repaid. In that situation, seniors or their heirs would only need to repay the sale price of the home, provided that it is sold for 95% of its current assessed value.

Unfortunately, there are also some notable disadvantages to getting a HECM, such as:

• Your existing mortgage(s) and all federal debt in default must be paid off with the loan. Otherwise, you will be required to bring money to closing.
• These mortgages generally have substantial closing costs, including an upfront mortgage insurance premium, and may be impractical if you only want one for a few years.
• Your home equity is being reduced over time, and you may have little or no equity left at the end of the loan.
• After the last surviving borrower dies, it may be difficult for your heirs to keep your home.
• You are still responsible for property taxes, homeowners’ insurance, and home maintenance. If you fail to keep up with those property charges, your lender will likely foreclose.

If you are getting phone calls or mail from prospective lenders, exercise some caution and remember that old adage about something sounding too good to be true. Before you decide, you should read the official reverse mortgage booklet put out by the National Council on Aging and approved by HUD called, “Use Your Home to Stay at Home.” After reading, contact a HUD certified reverse mortgage counselor, to have an unbiased discussion about your options.

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Katharine (Katie) Burns is an attorney, housing counselor and HUD certified reverse mortgage counselor at ELM. She became a member of the ELM team initially as an AmeriCorps State Member in 2013, but she was hired for her current position in September of 2014.

In 2010, Katie graduated from Regent University in Virginia Beach with her Juris Doctorate (Cum Laude). Prior to coming to Elder Law, she did a variety of document review projects for other attorneys, and donated her time to Legal Services of South Central Michigan as a pro bono attorney. She also assisted with the intake and triage process for new clients.

During Katie’s AmeriCorps service year at ELM, she was the Foreclosure Prevention Manager, and provided foreclosure prevention services and outreach to clients in ELM’s housing target area. Currently, she provides housing counseling and legal advice to seniors in Michigan, and HECM (reverse mortgage) counseling to seniors around the country.