Understanding Reverse Mortgages
A reverse mortgage is a type of loan available to homeowners age 62 or older. Unlike a traditional mortgage, where you make payments to the bank, a reverse mortgage allows the bank to make payments to you. The loan is secured by your home, and you don’t have to repay it until you move out, sell the house or pass away.
Most reverse mortgages in the U.S. are Home Equity Conversion Mortgages (HECMs), which are insured by the Federal Housing Administration (FHA). This government backing provides certain protections, like ensuring you’ll never owe more than your home is worth.
But when is a reverse mortgage a good idea? Let's take a look.
When to Consider a Reverse Mortgage
A reverse mortgage can be a helpful tool, but it’s not for everyone. Here are some situations when it might make sense:
- Supplementing retirement income. If Social Security and savings don’t quite cover your expenses, a reverse mortgage can provide extra cash to pay bills, groceries or medical costs.
- Paying off an existing mortgage. If you still have a regular mortgage, using a reverse mortgage can eliminate monthly payments, freeing up cash for other needs.
- Aging in place. Many older Americans want to stay in their homes. A reverse mortgage can provide the funds to pay for home modifications, like wheelchair ramps or bathroom upgrades, that make aging in place possible.
- Covering unexpected costs. A reverse mortgage can create a financial cushion for emergencies, such as medical bills or major home repairs.
If you have no plans to move soon, have significant equity in your home and need additional income, a reverse mortgage could be worth considering.
How Reverse Mortgages Can Be Helpful
Reverse mortgages offer several benefits that can make retirement more comfortable:
- No monthly payments. You don’t have to make monthly loan payments. Instead, the balance is repaid when the home is sold or no longer your primary residence.
- Flexible payment options. You can receive money as a lump sum, a line of credit, monthly payments or a combination. Many homeowners like the line of credit option, which grows over time.
- Non-recourse loan. You (or your heirs) will never owe more than the home’s value, even if housing prices drop.
- Stay in your home. You get to remain in your house as long as you follow the loan’s rules, like keeping up with property taxes, homeowners insurance and maintenance.
For retirees who are “house rich but cash poor," this can be a powerful way to unlock wealth tied up in their home.
What to Avoid During the Process
While reverse mortgages can be useful, there are also risks and pitfalls to watch out for:
- High fees and closing costs. Reverse mortgages often come with higher upfront costs than traditional loans. Make sure you compare fees and shop around for the best terms.
- Failure to pay taxes and insurance. Even though you don’t make monthly mortgage payments, you’re still responsible for property taxes, homeowners insurance and maintenance. Falling behind can lead to foreclosure.
- Impact on benefits. The money from a reverse mortgage usually doesn’t affect Social Security or Medicare, but it could impact eligibility for needs-based programs like Medicaid. Talk with a financial advisor if this applies to you.
- Leaving less for heirs. A reverse mortgage reduces the equity in your home, which means your heirs may inherit less. If leaving the house to family is a top priority, think carefully before proceeding.
- Scams and aggressive sales pitches. Unfortunately, some companies prey on seniors by pushing unnecessary products like annuities alongside reverse mortgages. Be cautious and always work with a lender approved by the U.S. Department of Housing and Urban Development (HUD).
Tips for Moving Forward
If you’re considering a reverse mortgage, here are some smart steps to take:
- Meet with a HUD-approved counselor. By law, you must meet with a housing counselor before getting a reverse mortgage. They’ll explain the details and help you decide if it’s right for you.
- Talk with your family. Since a reverse mortgage can affect your heirs, it’s a good idea to discuss your plans openly.
- Compare lenders. Just like any loan, terms can vary. Get quotes from multiple lenders to find the best deal.
- Consult a financial advisor. A trusted advisor can help you see how a reverse mortgage fits into your overall retirement plan.
Make the Best Decision for Your Situation
A reverse mortgage isn’t free money, but it can be a valuable financial tool for the right homeowner. It can provide steady income, reduce financial stress and allow you to stay in the home you love. At the same time, it’s important to understand the costs, risks and long-term effects.
If you’re over 62, plan to remain in your home and want to tap into your home’s equity, a reverse mortgage may be worth exploring. Be sure to proceed carefully, ask plenty of questions and avoid rushing into any deal. With the right planning, a reverse mortgage can help turn your home into a financial resource for a more comfortable retirement.