How to pay back your HEI: reverse mortgage

An HEI has many advantages over traditional financing options when you need to borrow money. HEIs don’t require monthly payments, and the qualification requirements may be easier to meet. You can also pay off your HEI at any time without penalty, most commonly through a cash-out refinance or home sale — but what if you want to stay in your home, without adding a monthly payment?

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Reverse mortgages could be a good solution if you meet the age requirements and are planning to stay in your property for a while. Reverse mortgages offer a similar arrangement to your HEI, with no monthly payments and easier-to-meet qualifications than traditional financing options. But unlike an HEI, a reverse mortgage is a way for you to tap into the home equity you’ve built over the years.  We’ll walk you through how reverse mortgages work and how to decide if it’s the right option for you. 

Reverse mortgage: An overview

You’re already familiar with making mortgage payments that steadily decrease your loan balance. A reverse mortgage works — as the name implies — in reverse. You’ll be taking out a loan where the lender pays you, steadily increasing your loan balance as the interest rate adds to it each month. Reverse mortgages are a regulated product, with a number of consumer protection rules and regulations enforced by the Department of Housing and Urban Development (HUD) and the CFPB. 

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There are three main types of reverse mortgages, with the first being the most common: 

• Home equity conversion mortgages (HECMs): HUD partners with lenders to offer these highly-regulated loans, which can be paid to you as a lump sum, a line of credit you can borrow against as you need, or as a monthly payment. 
• Single-purpose reverse mortgage: These are offered by state or local governments and nonprofits for specific purposes, such as catching up on home repairs or paying your property taxes. 
• Proprietary reverse mortgage: Also known as “jumbo reverse,” private lenders may offer these to borrowers with higher-value homes, potentially allowing them to access larger amounts of money. 

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We’ll focus our discussion here on HECMs since they’re the most common. 

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HECMs are fairly standardized, however. You’ll need to meet certain qualifications, most important being:

• Age: You’ll need to be at least age 62 or older.
• Residency: You’ll need to use the home as your principal residence.
• Home maintenance: You’ll need to stay up-to-date on any repairs and maintenance.
• Insurance and taxes: You’ll need to pay for homeowners insurance and stay current on your tax bill.

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You won’t need to repay your reverse mortgage until you move, sell your home, pass away, or fall behind on repairs, taxes, and insurance. The only exception is for non-borrowing spouses who meet certain qualifications to continue living in the home if you pass away or move to an assisted living facility. 

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Pros and cons of using a reverse mortgage to pay back your HEI

Reverse mortgages and HEIs have a lot of similarities not found in other finance tools, but they are not the same thing. If you’re ready to pay back your HEI, here is what you should consider before taking out a reverse mortgage:

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Pros 

• Stay in your home: You’ll get to stay in your home payment-free as long as you’re able to continue meeting the conditions of your reverse mortgage. Your spouse may also be able to stay in the home after you’re gone in some cases, even if they’re not a borrower.
• No set term length: A reverse mortgage is due in full only when repayment is triggered — whenever that happens to occur — meaning there is no specified term length. 
• Easier qualification: You won’t need to meet strict income and credit requirements like with traditional financing. 
• Access to more funds: Depending on your mortgage balance, home value, and age, you may be able to cash out more of your home equity with a reverse mortgage – up to just over 60% of the value of your home.
• Skip monthly payments: You can repay the loan over time if you like, but you won’t be required to make any payments until final repayment is triggered. 
• Repayment safeguards: Your loan balance may continue growing, but you won’t have to repay more than the fair market value if you sell your home. Your heirs also receive the option to purchase the home at 95% of the fair market value. 

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Cons

• Stricter age and home limits: You’ll need to be at least 62 years old. If you have any federal debt or a mortgage remaining, your reverse mortgage funds will need to pay those off first before you can access the money. 
• Increasing loan balance: Interest and fees accelerate the growth of your loan balance, even to the point of exceeding your home’s actual value (although there are caps in place for repayment).
• Not assumable by heirs: Unlike Point’s HEI which can be assumed by your heirs, a reverse mortgage must be repaid before your heirs can take ownership of your home.
• Cost of funds: Like with other financial products, the interest rates on reverse mortgages vary over time (and there are both fixed and adjustable-rate options). Compared to other options like home equity loans or HELOCs, reverse mortgages may be a more expensive way to borrow money.
• Repayment automatically triggered: Certain events – such as moving out of your home for more than 12 months or falling behind on maintenance, property taxes, or homeowners insurance – may trigger automatic repayment. Be sure to consider your ability to keep up with expenses and stay in your home. 

Is a reverse mortgage the best way to pay back your HEI?

Reverse mortgages are not a common option for paying back an HEI, but you can still use them if you meet the eligibility requirements. Here are a few questions to ask yourself first:

What are your goals in paying off your HEI?

Many people choose to repay their HEI early because they want to regain control over the future equity appreciation in their home. Remember: a reverse mortgage converts your home equity into cash today. If you want to preserve your home equity for the future, then a reverse mortgage might not be best option for you. 

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However, a reverse mortgage could be a part of your retirement strategy if you’re looking to borrow additional funds to tide you over until you reach age 70, when you’ll earn your full Social Security monthly benefit. If you have no first mortgage, you may be able to get more funds with a reverse mortgage than you could with an HEI. If you are interested in a reverse mortgage as a longterm part of your retirement strategy, but cannot yet access the amount of funds you want due to age or mortgage balance, an HEI can provide a bridge that lets you cash out some home equity while you wait.  

Do you want to leave your home to your heirs?

A Home Equity Investment is an assumable product, meaning that your heirs are able to take on the agreement if they wish and retain possession of your home. In contrast, your heirs would need to pay off your outstanding reverse mortgage balance in order to keep the home. Even at a discounted rate, that can be a substantial sum that many people can’t afford.

Do you have a spouse?

The rules governing how a reverse mortgage impacts your spouse can be very complex, especially if they won’t be listed as a co-borrower on the loan. Your spouse can still stay in your home in some cases even after you’re no longer there, but you’ll need to be especially diligent about setting things up correctly ahead of time. 

Have you considered other options?

If you're simply looking to pay off your HEI you have many other options, including:

• Re-Point HEI
• Selling your home
• Cash-out refinance
• Cash savings and reserves
• Home equity loan or HELOC

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Depending on your goals, taking out a Re-Point HEI may be a good option, potentially allowing you access to additional funds while extending your HEI for another 30-year term.