Reverse Mortgage

People over the age of 62 may be eligible for a Reverse Mortgage. If you need money to cover any expenses in your retirement, you should consider a reverse mortgage — a type of loan secured by your home. It allows you to keep your home but convert part of the equity into cash. When borrowing against your equity, you get access to cash in either a lump sum or monthly payments. People typically use reverse mortgage funds to pay off debts, cover health care expenses, do home renovations, or even pay for travel expenses. It is important to weigh the pros and cons of a reverse mortgage, since this type of loan can reduce the amount of home equity that is available to the borrower’s heirs.

Overview

Think of a reverse mortgage as a conventional mortgage where the roles are switched. In a conventional mortgage, a person takes out a loan to buy a home and then repays the lender over time. In a reverse mortgage, there is no monthly repayment structure. You are only required to repay the loan when you sell or refinance. Because there are no monthly installments on the interest accrued, the interest is compounded onto the balance of the existing mortgage and when you sell or refinance, the mortgage balance and interest are all due.

Most reverse mortgage loans are not repaid by the borrower. Instead, when the borrower moves or passes away, the borrower’s heirs sell the property in order to pay off the loan. The borrower (or their estate) gets any excess proceeds from the sale.

Pros and Cons of a Reverse Mortgage:

Pros:

You continue to live in your home and retain the title to your home as long as you continue to pay your property taxes, insurance, and maintenance.
You generally receive the proceeds of the loan tax-free cash in which you can use the money as you choose.
You no longer make monthly payments on a mortgage during the course of the loan, though you do have to follow the constructs of the loan guidelines.
A reverse mortgage is a non-recourse loan meaning neither you or your heirs are liable for any amount of the mortgage that exceeds the value of your loan.
You choose the disbursement options. You do not have to take the amount all at once.

Cons:

If you can’t keep up with basic home maintenance, property taxes, or insurance, your lender can call for your loan to be due and payable in full.
The balance of the loan increases over time as does the interest on the loan and associated fees.

Reverse Mortgage FAQs

Who is eligible for a reverse mortgage?

To qualify for a government-sponsored reverse mortgage, the youngest owner of a home being mortgaged must be at least 62 years old. Borrowers can only borrow against their primary residence and must also either own their property outright or have at least 50% equity with, at most, one primary lien—in other words, borrowers can’t have a second lien from something like a HELOC or a second mortgage. If the borrower doesn’t own their house outright, they usually have to pay off their existing mortgage with the funds received from a reverse mortgage.

Is a reverse mortgage a good idea for retirement?

A reverse mortgage requires no monthly payments and helps retirees access cash to make their retirement comfortable. It can be a good way to pay off unexpected costs that come with retirement in order to live the lifestyle you want. If you have built up equity in your home, a reverse mortgage can allow you to supplement your retirement income.

Why would a borrower want a reverse mortgage?

Over the age of 62, getting a reverse mortgage can enable borrowers to get extra cash flow during their retirement. By using the equity a borrower has built up in their home, they can retain homeownership and pay off costs that are necessary. In addition, reverse mortgages can help with travel and leisure costs, enabling a more enjoyable retirement.

How much money can you get from a reverse mortgage?

The potential loan amount that you can get depends on the amount of equity you have built up in your home. If you own your home outright, you can borrow a certain percentage of your home’s value. If you currently have a mortgage, you can pay off the rest of the mortgage with the reverse mortgage but this will result in less cash flow. Other factors also affect the loan amount including interest rates, your age, payout options, and upfront costs and fees.

What are the downsides of a reverse mortgage?

Since a reverse mortgage involves taking cash out of home equity, it can result in less inheritance for the borrower’s children. If the homeowner decides to sell the property, the reverse mortgage would have to be paid back, resulting in less income from property liquidation. Reverse mortgages also come with higher upfront fees and closing costs.