HECMs, known as Reverse Mortgages, offer older homeowners the ability to tap into the equity of their home without having to sell. Given the recent increases in property values since Covid, there are a number of reasons why a homeowner would consider taking some of the equity out of their home to supplement their retirement income, social security, or pension.
Like any financial product, HECMs come with potential risks to the borrower. Homeowners should carefully consider the risk versus reward to make sure that a reverse mortgage aligns with their long-term financial goals.
Certain risks to consider
Loan Costs
Some HECM products include origination fees, closing costs, insurance premiums, and servicing fees. These fees reduce the amount of cash available to the borrower.
Accrued Interest
HECMs do not require monthly payments resulting in accrued interest over time which is added to the loan balance. This could be an issue at time of sale if equity is further eroded compared to area property values.
Decreased Equity
Loan balances increase over time due to accrued interest on the loan. This could impact a homeowner’s ability to access funds from a sale in the future or decrease inheritance for heirs.
Risk of Foreclosure
Even though a borrower is not required to make monthly mortgage payments, they still must maintain the property, pay homeowners insurance and pay property taxes. Failure to meet these obligations could lead to a mortgage default, foreclosure and to the loss of the home.
Impact on Government Benefits
Borrowers should be aware that funds received from a HECM may affect a borrower’s eligibility for certain government benefits like Medicaid or Supplemental Security Income.
Changes in Home Value
The amount of equity available through a HECM depends on the value of the property. If the value decreases over time due to market changes the amount of equity available may decrease as well.