Liz Weston: Should seniors consider a reverse mortgage now?

Reverse mortgages allow older homeowners to turn part of their home equity into tax-free cash, using a loan that doesn’t have to be paid back until they die, sell or move out.

That sounds good to a lot of seniors navigating financial fallout during the coronavirus pandemic. Stay-at-home orders may have taken away jobs needed to make ends meet, while low interest rates and a volatile stock market have endangered income from retirement savings.

A reverse mortgage could be exactly the right tool at the right time. Or it could be an expensive mistake. It’s important to understand exactly how these loans work and to explore alternatives before you commit.

REVERSE MORTGAGE BASICS

Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are insured by the federal government. Borrowers must be 62 or older and have substantial home equity.

The amount you can borrow not only depends on your equity and the home’s value, it also varies based on your age, current interest rates and HECM program limits. The higher your age and the lower the prevailing interest rate, the more you can typically borrow. Currently the program will let you borrow against a maximum of $765,600 in home value.

Borrowers can get a lump sum, a line of credit or a series of regular payments. Reverse mortgages can also be used to pay off an existing mortgage or to buy a home.

You don’t have to make payments on a reverse mortgage, even if you end up owing more than the house is worth. You can, however, wind up in foreclosure if you fall behind on property taxes, homeowners insurance or homeowners association fees.

REVERSE MORTGAGES AREN’T CHEAP

Most of the costs are taken from your loan proceeds, so you don’t pay them out of pocket, but it’s still an expensive way to borrow....