Twice a week, our CEO and resident money guru Jean Chatzky tackles your burning questions in the HerMoney newsletter. We’ve pulled some of the best to feature on our website — and this one made the cut! Got a question for Jean? Send it her way right here.
Q: Today’s question comes from Janet. She writes: I see ads for reverse mortgages on TV all the time. What are they, and how do they work?
A: A reverse mortgage lets homeowners who are 62 and older borrow against their home’s equity without making monthly payments. Your home stays in your name, but the loan balance grows over time as interest and fees are added. Usually, the loan is repaid when you move out or sell the home. With a reverse mortgage, you’re still responsible for the property taxes, homeowner’s insurance, and keeping the home in good condition – not to mention keeping it as your principal residence.
The most common type, a Home Equity Conversion Mortgage (HECM), can provide a lump sum, monthly payments, or a line of credit. HECMs are federally insured and allow Americans 62 and older to borrow money against the equity in their home, with no obligation to repay as long as they live there. Once the home sells, the lender is paid back in full from the proceeds. A HECM can be a useful way to access equity if you plan to stay in your home long-term and a line of credit is often the smartest structure.
That said, reverse mortgages can be expensive. Upfront costs are steep, and unfortunately, reverse mortgage fraud is a thing. Anyone considering one should weigh the costs, consequences and compare options (you can do that here) before moving forward.
Lastly, check out this piece I wrote for AARP, which highlights seven essential questions homeowners should ask before choosing a reverse mortgage.
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