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.

Is a Reverse Mortgage Right for You?

A reverse mortgage can be a powerful tool for those looking to enhance their retirement finances. However, it’s important to evaluate your unique financial situation, long-term goals, and the impact on your heirs.

If you’re considering a reverse mortgage, consult with a trusted professional to explore your options and make an informed decision.

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.

Who Should Consider a Reverse Mortgage

A reverse mortgage may be a good idea if:

You have significant home equity and plan to live in your home long-term.
You need extra income to cover retirement expenses or pay off debts.
You don’t mind reducing the amount of inheritance for your heirs.
You’ve explored other options and determined this aligns with your financial goals.

Who Should Avoid a Reverse Mortgage

It may not be a good idea if:

You plan to move or sell your home in the near future.
You’re concerned about leaving a significant inheritance for your heirs.
You can meet your financial needs through other means, such as downsizing or a home equity line of credit (HELOC).

How much money can you get from a reverse mortgage?

The potential loan amount that you can get depends on;

Your age
Home value
Mortgage balance
Interest rates

Typically, you can borrow 40% to 60% of your home’s appraised value, depending on the factors above. For example, If your home is valued at $400,000, you might access $160,000 to $240,000 after paying off any existing mortgage balance.

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.