What is a Reverse Mortgage?

Couple holding a piggy bank

A mortgage is pretty straightforward, and it would be sensible for a reverse mortgage to be simply that—a mortgage in reverse. However, a reverse mortgage is much more than that, and understanding what it is and how it might be advantageous for you could help you become more financially secure in the future. Read on to learn all about reverse mortgages, their pros and cons and what you need to know before you make the decision to get one yourself.

What is a Reverse Mortgage?
A reverse mortgage usually means that a homeowner is leveraging the equity they have built up in their home to create an income stream for themselves for the future. Most reverse mortgages are Home Equity Conversion Mortgages, special mortgage agreements for home owners older than 62 that are insured by the Federal Housing Administration. These allow home owners to tap into the equity they have built in their homes to create an income source. The money is in the form of loans and can be paid to the home owner in either a lump sum or ongoing payments depending on the mortgage type.

What are the Requirements for a Reverse Mortgage?
A reverse mortgage can benefit many people, but homeowners must meet specific requirements to qualify for an FHA-backed Home Equity Conversion Mortgages:

  • Homeowner must be aged 62 or older
  • Homeowner must have a very low or no principal balance on the home
  • The home must be the owner’s principal residence. Second homes and investment properties do not qualify
  • Homeowner must participate in training from a HUD certified housing counselor
  • Other requirements and qualifications apply

Why Would I Want to Get a Reverse Mortgage?
In general, reverse mortgages help homeowners who either own their home outright or who have a very small remaining balance on their mortgage turn the home’s equity into an income stream, usually for retirement. For qualified homeowners, a reverse mortgage can help provide steady monthly and offset costs of living for homeowners on fixed incomes.

What are the Downsides?
Many financial advisors maintain that homeowners shouldn’t sacrifice the equity in their home for income, and advise against seeking a reverse mortgage as a retirement strategy. In addition, reverse mortgages are loans that come with interest rates and closing costs including appraisal and origination fees, as well as mortgage insurance.

To fully understand whether a reverse mortgage might be right for you, speak with a HUD-approved housing counselor about your options. For more information about home ownership and how the NC Housing Finance Agency can help make buying and owning a home more affordable for North Carolinians, visit www.nchfa.com/home-buyers.