A Home Equity Conversion Mortgage (HECM) could be a viable choice for a potential borrower who has paid off their existing forward mortgage, and is looking for additional cash flow to fund expenses which may include repairs or healthcare costs. The solution should also make potential borrowers think long-term about associated costs and bequest assets, however.
This is according to a column written by certified financial planner (CFP) and President of the Charles Schwab Foundation Carrie Schwab-Pomerantz, in a new column published by newsmagazine Parade.
“On the plus side, a reverse mortgage will allow you to tap into a portion of your home’s equity without having to make monthly payments,” Schwab-Pomerantz writes. “On the downside, the fees and interest charges are typically higher than those for a cash-out refinance or Home Equity Line of Credit (HELOC). When combined with the amount of money you borrow, this can significantly erode the equity that you’ve built up in your home. Let’s go over more particulars so that you’ll be able to make an informed decision.”
In detailing reverse mortgages, Schwab-Pomerantz covers only HECMs, and suggests her readers only consider this variation of the reverse mortgage product.
“That’s because HECMs are regulated and insured through the federal government by the Department of Housing and Urban Development (HUD) and the Federal Housing [Administration] (FHA),” she writes. “Other types of reverse mortgages don’t have these protections.”
Financing the costs of a reverse mortgage including the initial mortgage insurance premium (IMIP), third-party charges, origination fee, interest and servicing fee could encroach on the amount of proceeds a borrower can get from the loan, she says.
“Financing these costs will lower the amount you can borrow and eat away at more of your home equity over time—leaving less to your estate,” she says. “It’s important to understand that with a traditional mortgage you build equity over time. With a reverse mortgage, you deplete equity that you’ve built up over time.”
In the end, the reverse mortgage product has evolved very much over the years, but longer-term questions should be essential for prospective borrowers, Schwab-Pomerantz writes.
“For the right individuals in the right situation, reverse mortgages can be a uniquely effective way to stay in your home during retirement,” she says. “But it’s essential to think long term, weighing the benefits, costs and risks.”
Read the article at Parade.