Reverse mortgages offer cash to homeowners, but it comes at a price

A reverse mortgage allows a homeowner to convert part of the equity in a home to cash without having to sell the property. The cash may be paid in installments or a lump sum, so typically you don’t need to pay anything back as long as you live in your house.

Factors such as age, the value of the property and how much remains on the mortgage all affect the amount of money a homeowner may borrow through a reverse mortgage.

But there are important things to consider. Owners typically must remain in the home for at least 5-10 years to make a reverse mortgage economical. In addition, because they’re deferring repayment of the reverse mortgage, the amount they owe will grow substantially over time. Interest charges are added to the loan each day it’s held, so it’s possible the reverse mortgage could grow to equal the value of the home.

People who take out reverse mortgages are also still responsible for property taxes, insurance and maintenance costs. You must be prepared to pay for some of the fees involved in the processing of a reverse mortgage loan, which can include an origination fee, closing costs, a mortgage insurance premium and a servicing fee.

A reverse mortgage loan must be repaid in full when the owner dies or sells the home. Repayment requirements may also be affected if the owner fails to pay property taxes or hazard insurance, allows the property to deteriorate, or doesn’t live in the home for 12 consecutive months.

Consumers interested in obtaining a reverse mortgage are advised to work with a Home Equity Conversion Mortgage (HECM) counselor who can help answer questions regarding eligibility, financial implications and other alternatives. HECM housing counselors are available free or at a very low-cost.

It is advisable to contact a real estate lawyer to review any agreements before signing.