How a reverse mortgage works
A reverse mortgage lets homeowners 62 and older borrow against their equity without making monthly loan payments. Most are Home Equity Conversion Mortgages, or HECMs, insured by the FHA. You can take money as a lump sum, monthly payments or a line of credit.
Interest and fees are added to the balance each month, so what you owe grows over time. The loan is usually repaid when the last borrower sells, moves out for good or passes away. You must keep living in the home, pay property taxes and insurance, and maintain the property.
How a home equity loan works
A home equity loan is a second loan with a fixed rate and a set monthly payment. You get the money as one lump sum, and your first mortgage stays as it is. Each payment lowers your balance, so you keep building equity.
CapCenter offers fixed-rate home equity loans from $50,000 to $250,000 with terms of 15, 20 or 30 years and ZERO Closing Costs (restrictions apply). They're available on single-family primary residences and second homes.
Side by side
- Age: reverse mortgage, 62 and older; home equity loan, no age requirement
- Monthly payment: reverse, none required; home equity, fixed payment
- Balance: reverse, grows over time; home equity, shrinks with each payment
- Qualifying: reverse, equity and ability to keep up taxes and insurance; home equity, credit, income and equity
- Repayment: reverse, when you sell, move out or pass away; home equity, over a fixed term
Costs to compare
Reverse mortgages often have higher upfront costs, including mortgage insurance premiums, origination fees and other closing costs. Because interest builds on a growing balance, the total cost over many years can be large. A home equity loan's cost is mainly its interest, which you pay down month by month.
What it means for your heirs
With a reverse mortgage, your heirs typically need to repay the loan or sell the home after you pass away. On an FHA-insured HECM, they generally won't owe more than the home is worth. With a home equity loan, the remaining balance is usually small by comparison, and heirs can pay it off or keep making payments.
Counseling and questions to ask
Before you get an FHA-insured reverse mortgage, you must meet with a HUD-approved housing counselor. That session is a good time to bring family members and ask hard questions.
- Will you stay in the home for the long term?
- Can you comfortably afford a monthly payment?
- Do your heirs want to keep the home?
- How will taxes, insurance and repairs be paid over time?
