Reverse Mortgages: What You Should Know

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If you’re older and have been in the same home for many years, you may have built up a large amount of equity in your home. If you find yourself in need of money, you may be considering taking advantage of this equity by taking out a reverse mortgage. Should serious health issues arise for you or a loved one, you may find yourself needing a large sum of money to help pay off excess medical bills. Perhaps you have a child in need of a loan to start a small business, and you want to be able to offer them this money to help them get ahead. Regardless of the reason, be sure you understand what is entailed in a reverse mortgage, and speak with an attorney well-versed in real estate and mortgage issues before committing to one.

What is a reverse mortgage?

A reverse mortgage is a way for homeowners who are 62 years old or over to change the equity they’ve built up in their home into cash. Since 2008, such loans are mostly known as Home Equity Conversion Mortgages (HECMs). The homeowners can borrow against that equity each month, which increases the loan balance, along with the applicable interest rate. The loan only becomes due when the last borrower or their spouse moves out of the home or passes away. Typically, the home will then be sold to pay back the loan, and the loan will never be larger than the value of the home. These loans are federally insured and regulated by the U.S. Department of Housing and Urban development.

Reverse mortgage or HECM proceeds can be used for any purpose whatsoever. Some borrowers use the money from a reverse mortgage to purchase a second home, or to facilitate saving the money they would otherwise spend on a mortgage payment. Additional loans like the HECM for Purchase and HECM Line of Credit can also make retirement more comfortable for borrowers; speak with a real estate attorney to determine which instrument would best suit your needs.

What are the risks of a reverse mortgage?

If you begin to borrow against the equity in your home when you’re relatively young and healthy, you run the risk of draining the equity from your home too early in your lifetime, forcing you into foreclosure or selling the home to pay back the loan. Reverse mortgages or HECMs may not be a good idea if you do not plan to spend many more years in your home, as you will not be able to recover the full value of your home in a sale due to the loan balance.

If you are considering a reverse mortgage, HECM, or have other legal questions regarding a Maryland real estate transaction, contact Annapolis real estate and construction lawyer Matthew S. Evans III for a consultation on your case, at 410-626-6009.

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