Are you a senior looking to access your home equity without having to make mortgage payments every month? A reverse mortgage may be an option worth considering. This guide will explain what reverse mortgages are, how they work, pros and cons to weigh, and whether a reverse mortgage is right for your unique situation.
A reverse mortgage is a special type of home loan that allows homeowners aged 62 and up to convert a portion of their home’s equity into cash. You retain ownership of your home, while the loan balance grows over time and does not need to be paid back until you sell the home or pass away.
With no required monthly mortgage payments, a reverse mortgage can provide seniors with additional income in retirement. But these complex loans also come with drawbacks like upfront costs and declining home equity. Let’s take a closer look at reverse mortgages and how to determine if one makes sense for you.
How Does a Reverse Mortgage Work?
Reverse mortgages work differently than traditional “forward” mortgages. Here’s an overview of how they work:
- You must be 62+ years old to qualify
- You take out a loan against your home’s value
- The loan does not need to be paid back as long as you live in the home
- You receive cash proceeds from the loan to use as you choose
- Interest is charged and gets added to the loan balance
- The loan comes due to be repaid when you pass away or move out
You retain ownership of your home and are still responsible for property taxes, insurance, and home maintenance. The loan balance grows over time as interest accumulates.
Proceeds can be taken as a lump sum, line of credit, monthly income stream, or a combination. This flexibility makes reverse mortgages appealing for seniors in need of extra cash.
What Are the Pros and Cons of Reverse Mortgages?
Reverse mortgages offer several benefits but also come with some risks to consider:
Pros
- Cash from your home equity without monthly payments
- No requirement to repay the loan as long as you live there
- Flexible payout options (lump sum, credit line, payments)
- Can be used to pay off an existing mortgage
- Income not subject to federal tax
Cons
- Upfront costs and fees can be high
- Interest rates tend to be higher than traditional mortgages
- Loan balance grows over time, leaving less home equity
- Scams and predatory lending are common – extra diligence needed
- Must repay loan to sell the home or move
- Not building home equity as with forward mortgage
Reverse mortgages allow seniors to tap home equity, but at the cost of reduced equity over time and large upfront expenses. Weigh the tradeoffs carefully based on your financial situation.
What Are the Different Types of Reverse Mortgages?
The main types of reverse mortgages are:
HECM Reverse Mortgages
Home Equity Conversion Mortgage (HECM) loans backed by the FHA are the most common reverse mortgages, especially for first-time borrowers. They come with strict eligibility criteria, lending limits, and consumer protections.
Proprietary Reverse Mortgages
Some private lenders offer proprietary reverse mortgages with higher lending limits and different terms. But they lack the protections and standardization of HECMs.
Single-Purpose Reverse Mortgages
Offered by some state/local governments and nonprofits, these have restricted uses for the funds, like home repairs. They tend to have lower costs and interest rates than traditional reverse mortgages.
HECM loans make up about 95% of reverse mortgages. But explore all options to find the optimal loan for your unique financial needs and situation.
What Are the Alternatives to a Reverse Mortgage?
Reverse mortgages allow seniors to access home equity, but also reduce the equity over time. Some alternatives to consider first include:
- Traditional home equity loan or line of credit
- Downsizing to a smaller home with cash proceeds
- Renting out a room in your home for extra income
- Tax deferral programs and senior property tax exemptions
- Budgeting and spending down savings/investments
- Part-time employment for retirees
A reverse mortgage should not be the first option explored. Make sure you have fully considered other methods of supplementing retirement income before taking out a complex reverse mortgage.
How Much Cash Can You Get from a Reverse Mortgage?
The amount you can borrow through a reverse mortgage depends on:
- Your age – Older borrowers get higher proceeds
- Current interest rates – Impacts loan amount
- Home value – The higher the value, the more equity available
- Location – Lending limits vary by county/metro area
Generally you can receive 10-60% of your home’s value in proceeds from a reverse mortgage. Use an online calculator to estimate how much you may qualify for based on your age, home value, and the prevailing interest rate.
Should You Get a Reverse Mortgage in 2024?
A reverse mortgage can be a reasonable option in certain situations, like:
- You need extra monthly income in retirement
- Paying property taxes/insurance is becoming a stretch
- You have high medical bills or other essential costs
- You want to delay drawing down retirement savings
- Paying off your existing mortgage provides peace of mind
But also consider the costs. Make sure you understand the complex terms. Consult a certified reverse mortgage counselor for guidance on whether it aligns with your overall financial situation and retirement plan.
The Bottom Line
Reverse mortgages allow homeowners aged 62+ to turn their home equity into tax-free cash available to fund retirement. While not suitable for everyone, they can provide financial flexibility for cash-strapped seniors needing extra monthly income.
Consider both the pros and cons carefully before applying for a reverse mortgage. Seek out objective counsel to determine if a reverse mortgage, or alternative options, are right for your unique needs and goals entering the retirement phase of life.