Reverse mortgages allow older homeowners to turn part of their home equity into tax-free cash, which sounds good to a lot of seniors navigating financial fallout during the COVID-19 pandemic.

As massive job losses, a volatile stock market and low interest rates have endangered the income sources of many retirees, reverse mortgages have become increasingly popular this year. But is it the right move for you now, or is it an expensive mistake?

Here’s what you should know about reverse mortgages before you commit.

What is a Reverse Mortgage?
A reverse mortgage is a unique type of loan that allows older homeowners to borrow money against the equity in their house (or condo) that doesn’t have to be repaid until the homeowner dies, sells the house or moves out for at least 12 months. At that point, you or your heirs will have to pay back the loan plus accrued interest and fees, but you will never owe more than the value of your home.

It’s also important to understand that with a reverse mortgage, you, not the bank, own the house, so you’re still required to pay your property taxes and homeowners insurance. Not paying them can result in foreclosure.

To be eligible, you must be 62 years of age or older, own your own home (or owe only a small balance) and currently be living there.

You will also need to undergo a financial assessment to determine whether you can afford to continue paying your property taxes and insurance. Depending on your financial situation, you may be required to put part of your loan into an escrow account to pay future bills. If the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on, you’ll be denied.

Loan Details
Around 95 percent of all reverse mortgages offered are Home Equity Conversion Mortgages (HECM), which are FHA insured and offered through private mortgage lenders and banks. HECM’s also have home value limits that vary by county but cannot exceed $765,600.

How much you can actually get through a reverse mortgage depends on your age (the older you are the more you can get), your home’s value and the prevailing interest rates. Generally, most people can borrow somewhere between 50 and 60 percent of the home’s value. To estimate how much you can borrow, use the reverse mortgage calculator at ReverseMortgage.org.

To receive your money, you can opt for a lump sum, a line of credit, regular monthly checks or a combination of these.

But be aware the reverse mortgages aren’t cheap. HECM loans require a 2 percent upfront mortgage insurance payment, plus an additional 0.5 percent annual charge, on top of origination costs and lenders’ fees. Any amount you borrow, including these fees and insurance, accrues interest, which means your debt grows over time.

Get Help
To learn more, read the National Council on Aging’s online booklet “Use Your Home to Stay at Home” at NCOA.org/home-equity.

Also note that because reverse mortgages are complex loans, all borrowers are required to get counseling through a HUD approved independent counseling agency before taking one out. Most agencies charge between $125 and $250. To locate one near you, visit Go.usa.gov/v2H, or call 800-569-4287.