Many homeowners find added stability and greater financial security through a reverse mortgage. Though it may not be the right solution for everyone — it's something worth considering.
Let's start by weighing the pros and cons:
Reverse mortgage pros
Remain in your memory-filled home.
You may be worried that you will be forced to downsize or move out of your home because of expenses. A reverse mortgage could help you remain in your home and pay for expenses that your retirement may not fully cover. Additionally, you won't have to make any repayments until you decide to move out of the house or you pass.
A reverse mortgage is a great way to beef up your existing financial situation. You may even consider using some of the funds from the reverse mortgage to put toward home improvement projects. For example, consider upgrades or projects that will make your home safer and easier to navigate as you get older.
Or, you could even use those funds to help put a family member through college. So there are many possibilities for you with a reverse mortgage. But it would help if you talked through your financial goals with a salary-based mortgage consultant, who can help you prioritize how best to utilize the funds from the loan.
Eliminate monthly payments by paying off your existing mortgage.
To qualify for a reverse mortgage, you will need to own your home or at least have paid a large majority of the mortgage over the years. Although, even if you haven't paid your entire home mortgage off, you can still take out a reverse mortgage and use the funds to pay off the original loan. As long as you occupy the house as your primary residence, a reverse mortgage means you will not have to pay a monthly mortgage.
The amount borrowed won't be due until you move out or pass. This is especially helpful when facing steep medical bills and additional costs that your current income or savings don't cover. For example, with housing and mortgage payments being the most considerable monthly expense, imagine what you could do with the money you save by not having to make those payments every month.
Receive additional retirement funds from your home's equity.
Are you concerned because you don't have as much cash saved up as you would like? One thing to consider is that you likely have a fair amount of equity in your home. With a reverse mortgage, you could take out your equity in the form of cash to cover expenses that you may not be prepared for with your existing retirement funds.
If your savings or retirement seem like they will not last you, a reverse mortgage can provide you with some financial flexibility. You will need to decide whether you plan to take out the lump sum upfront or whether you prefer getting monthly installments as a cushion. It depends on what your goals are. For example, a lump sum may be necessary if you want to fund home improvement projects or other big-ticket purchases.
Enjoy tax-free money.
Because the funds from a reverse mortgage are not considered taxable income but a loan advance, these funds will remain tax-free. This is true regardless of if you access the funds as monthly income, a line of credit, or a lump sum.
Additionally, you can use the funds however you see fit. For example, you could do some traveling, put it toward in-home care if and when needed, or medical bills and supplies. When discussing a reverse mortgage, getting financial planning advice is advised so you can make the most of the funds depending on your specific needs and situation.
Postpone touching your retirement funds, pension, or Social Security.
Regardless of what you have already saved up in retirement funds, a reverse mortgage offers the bonus of a reliable source of monthly income. This means you don't have to use up your retirement funds as quickly as you may have had to. Also, avoid early retirement withdrawal penalties by using the reverse mortgage funds instead of pulling them from your other retirement accounts.
Out-of-pocket costs are minimal since fees and insurance can often be financed into the loan.
While you must continue to pay homeowner's insurance and taxes, these fees can usually be rolled into the reverse mortgage loan amount. Be sure to ask your salary-based mortgage consultant how this will be calculated into your loan.
While the interest and fees that come along with your reverse mortgage get added to the loan, this means that you will see the amount you owe grow over time. So be prepared to watch your equity deplete over time as well.
Once the loan is due, you sell the home to pay the loan — you never owe more than it's worth.
The good news is that you won't have to pay back more than what the house is worth. For example, if your home ends up losing value due to prices in your neighborhood depreciating, you won't have to pay back more than what your home is valued at. Likewise, if, for some reason, your home ends up being valued less than what you owe on the reverse mortgage, you or your heirs will be protected from paying an additional amount.
Additionally, you don't have to worry about paying the loan back until you move out of the house, sell it, or pass away. When you leave your home or sell it, the money earned from the home's sale will go towards paying off the remaining balance of the reverse mortgage.
After the loan is repaid, any remaining equity belongs to you or your heirs.
Whether your heirs keep the home or sell after your passing, they will have to pay the entire loan back or up to 95% of the home's appraised value. The good news is that if the house sells for more than what you owe, you or your heirs will be able to keep the additional funds.
How much and how quickly you spend the funds will determine how much equity remains in the home. Thinking all of this through before taking out the reverse mortgage is important, so no one you love ends up being on the hook for paying it off or losing an intended inheritance. Speaking with a financial advisor is a great idea to get the big picture on whether it is the best option for you in the short and long term.
Reverse mortgage cons
Not all properties qualify (because you must live in the home as your primary residence, investment properties and vacation homes do not qualify).
You won't be able to take out a reverse mortgage on a vacation home. You must be and must remain living in your home to qualify.
Fees are involved (just as they were when you took out a mortgage).
Interest and the service fees that come with any other home loan will be added to the loan and should be considered when doing a reverse mortgage.
The loan balance grows over time, which may limit your heirs' inheritance.
Just think of the opposite, or reverse, of a regular loan. With a typical loan, the balance decreases over time as you pay off the loan, all while this increases the equity you have in your home. Conversely, a reverse mortgage means that the amount due grows over time, and your equity decreases as you tap into those funds.
Medicaid and other need-based government assistance can be affected if too many funds are withdrawn (and not spent) in one month.
You will want to ensure that a reverse mortgage will not negatively affect your eligibility for low-income assistance programs like Medicaid. It is worth discussing this with your salary-based mortgage consultant when looking into a reverse mortgage.
The loan will become due if the homeowner fails to pay their property taxes or homeowners insurance or fails to maintain the property.
If there is a period up to 12 months where you are not living in your home, whether it be a medical issue or you have moved into a long-term facility, your loan is then due, or you possibly risk foreclosure.
How to qualify for a reverse mortgage
Some qualifications must be met to receive reverse mortgage funds.
Must be 62 years or older, though a non-borrowing spouse can be under 62
Live in the home as your primary residence
Own the home and meet financial requirements
If qualifications are met, a borrower can begin further discussing eligibility, mandatory counseling, application, loan processing, underwriting, and closing.
Upon receiving reverse mortgage funds, the borrower must continue paying homeowners insurance and property taxes. They must also keep the home properly maintained, or the loan may become due.
Our recommended approach
The best way to understand a reverse mortgage is to talk through requirements with a licensed professional. At American Financing, we have salary-based mortgage consultants. So, you can expect simple, straightforward, and honest conversations. Why not see if a reverse mortgage is for you?
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
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