Reverse Mortgages: Why to Use One and When it Makes Sense

Senior couple on front door porch of house

Reverse mortgages are helpful financial tools when it comes to investing in your future. The most effective uses include:

  1. Using the funds to pay off your current mortgage

  2. Accessing cash to make renovations (so you can age safely at home)

  3. Supplementing your monthly income

  4. Growing a line of credit

Eliminate mortgage payment → add to your monthly budget

The biggest reason why American Financing borrowers choose a reverse mortgage: to pay off their existing mortgage before retirement. Think of it this way -- a mortgage payment is likely the largest monthly bill in your budget. It could be anywhere from $1,100 to $2,000 a month (maybe less, maybe more) depending on your loan amount, interest rate, and program type. That’s significant savings, should you choose to pay off your loan via a reverse mortgage. And with prescription drug costs soaring and the cost of living increasing, every extra dollar can help.

Just keep in mind you will have an ongoing obligation to pay property taxes and homeowner's insurance.

Access home equity → receive funds in a lump sum

Most often borrowers will take out a portion of available funds, as a way to preserve their home equity. They’ll choose to receive a portion of funds in one lump sum. This option proves most beneficial when it comes to making home repairs or renovations. Maybe it’s adding a ramp, a walk-in shower, even replacing a roof. No matter the reason -- it’s an easy way to access a significant amount of cash without having to make high-interest monthly payments (as you would on a personal loan or credit card).

Fixed monthly payments → let your home pay you

Enjoy another option for monthly income. According to Northwestern Mutual, the average cost of retirement is nearly $1 million. Though the amount you’ll need depends on a lot on the kind of life you want to live, keep in mind that there are many costs that may surprise you (medical, prescription, transportation, etc.). Are you confident your budget will last? If not, using a reverse mortgage to receive fixed monthly payments is a great option to supplement your income.

Line of credit → let funds grow until needed

Consider this option your emergency backup. It’s an easy way to preserve investment accounts during market downturns or to build a safety net for unplanned emergencies. The line of credit is set up in advance -- before funds are needed -- so it’s ready to help you in time of need.

It makes sense to choose a reverse mortgage if…

  • You need extra money, but do not qualify for state or local assistance programs

  • You have enough income to cover property taxes, homeowners insurance, and home maintenance expenses

  • You do not want to sell your home

  • You want to delay Social Security benefits

  • You’re fine with selling your home when it’s time to pay the loan (as opposed to leaving it to heirs)

Let’s not forget the many ways to use reverse mortgage funds…

  • Pay for long-term care insurance

  • Pay for grandchild’s college

  • Bridge the gap until Medicare kicks in

  • Pay for short-term caregiving

  • Eliminate credit card debt

  • Cover the costs of transportation

  • Pay your Medicare Part B and Part D costs

  • Have money available for estate plans and wills

  • Delay collecting Social Security benefit until it maxes out at age 70

  • And much, much more

Keep in mind a reverse mortgage may not make sense for everyone. Your best approach is to speak with your financial advisor and with a licensed reverse mortgage expert.

These materials are not from HUD or FHA and were not approved by HUD or a government agency.

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