Reverse Mortgage

A reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), allows homeowners aged 62 or older to convert part of their home equity into cash. This financial product can provide additional income during retirement without requiring the homeowner to sell their home or make monthly mortgage payments. Instead, the loan balance increases over time and is typically repaid when the homeowner sells the home, moves out permanently, or passes away.

In a reverse mortgage, you can borrow against the equity in your home. The loan is secured by your house, and you are not required to make any payments until the loan term ends, which usually occurs when you move out, sell the house, or pass away. During the term of the loan, interest accrues on the borrowed amount and compounds over time.

At the end of the loan term, the debt must be repaid. If the accumulated debt exceeds the home’s equity, the lender can only claim the proceeds from the sale of the house to cover the loan. This can potentially leave no assets from the home’s equity for your heirs or personal needs post-mortem.

For almost every reader of this book, a reverse mortgage is the wrong instrument: the upfront mortgage insurance premium and origination costs are heavy, the principal limit releases only a fraction of your equity, and the product has a long history of aggressive marketing to people who did not understand what they were signing. If you have a liquid portfolio, you have cheaper ways to raise cash — an SBLOC (section “Asset Backed Loans (ABL)”) or a HELOC opened while you still have income to qualify.

Two features that complete the picture, and are usually left out. The verdict above is about you; the product is not a scam, and dismissing it without these two mechanics leaves you unable to advise a parent who genuinely needs it.

It is non-recourse, and the insurance is real

A HECM is federally insured, and neither you nor your heirs can ever owe more than the home is worth. If the balance grows past the value — which is the expected outcome on a long hold — FHA insurance covers the lender’s shortfall and the estate walks away. Heirs who want to keep the house can settle at 95% of appraised value regardless of how large the balance grew. That asymmetry is paid for by the mortgage insurance premium, and it means the borrower is short a put option on their own house that the government wrote for them.

The unused credit line grows

Take the HECM as a line of credit instead of a lump sum or tenure payment, and the undrawn portion compounds at the note rate plus the ongoing MIP — contractually, and independent of what the house does. A line opened at 62 and left untouched can be substantially larger at 75, even if the home has not appreciated at all, and it cannot be frozen or cancelled the way a HELOC can. That makes an early, unused HECM line a genuine hedge against sequence-of-returns risk (section “Sequence of Returns Risk”): in a bad market year you draw on the line instead of selling equities into the drawdown, and repay it when markets recover. This “standby line of credit” strategy is the one legitimate research-supported use of the product, and it is the opposite of how it is usually sold — you open it early and hope never to need it.

None of that changes the verdict for a household with a seven-figure liquid portfolio. It changes the verdict for a house-rich, cash-poor retiree, which is a description that fits a great many parents.

When/who is a reverse mortgage candidate?

• Aged 62 or older.
• Own your home.
• Has significant equity in the home.
• Live in the home as your primary residence.
• Have insufficient savings or income to support themselves

How a reverse mortgage actually plays out (Pro means the RM is helpful):

For more detailed information, refer to the consumer financial protection bureau (CFPB) guidelines on reverse mortgage loans.