As a retiree, managing finances on a fixed income can be challenging. If you’re a homeowner and have substantial equity in your home, a reverse mortgage could be a potential solution to supplement your income during retirement.  

In this article, we’ll walk you through what a reverse mortgage is, the advantages and disadvantages, and help you decide if it’s the right option for your financial situation. 

 

What is a Reverse Mortgage? 

A reverse mortgage is a special type of loan available to homeowners aged 62 or older that allows you to convert part of your home equity into income without having to sell your home or make monthly payments. This income can help cover everyday costs in retirement when your income might be reduced. 

Unlike a traditional mortgage, where you make monthly payments to the lender, in a reverse mortgage, the lender pays you either in a lump sum, through a line of credit, or as monthly installments. The amount you owe grows over time, but the loan is only repaid when the homeowner moves out, sells the home, or passes away. 

 

Reverse Mortgage vs. Regular Mortgage 

Here’s a quick comparison to highlight the main differences between a traditional mortgage and a reverse mortgage: 

 

Feature	Regular Mortgage	Reverse Mortgage
Monthly Payments	Required	Not required
Loan Type	Borrower repays lender	Lender pays borrower
Home Equity Use	Builds over time	Decreases over time
Taxable	No	No
Impact on Heirs	Home is passed down with debt	Home may need to be sold

 

As you can see, a reverse mortgage is quite different from a regular mortgage, with the key difference being that you don’t have to make monthly payments on the loan. 

 

Advantages of Reverse Mortgage 

1. Better Expense Management in Retirement

One of the main reasons people choose a reverse mortgage is the ability to manage expenses more easily in retirement. When your income is reduced after you stop working, it can be difficult to cover your living costs. A reverse mortgage allows you to tap into your home’s equity and supplement income without taking on new debt or making monthly payments. 

2. Stay in Your Home

A reverse mortgage lets you age in place—you don’t have to sell your home or downsize. This can be a big advantage if you love where you live and want to stay there for the long term. It might also be more cost-effective than buying a new home or renting. 

3. Tax-Free Income

The funds you receive from a reverse mortgage are considered loan proceeds, not income, so you don’t have to pay taxes. This can be a helpful way to access cash without the added burden of a tax. However, other agencies might consider the proceeds income in certain situations. 

4. Non-Recourse Loan

Reverse mortgages are non-recourse loans, meaning that if the balance on your loan exceeds the value of your home, neither you nor your heirs will have to pay the difference. This protects your other assets and ensures that the lender cannot go after them to recover the debt. 

5. Flexible Payment Options

With a reverse mortgage, you can choose how you receive your funds: as a lump sum, a line of credit, or monthly payments. This flexibility allows you to tailor the arrangement to your specific financial needs and preferences. 

 

Disadvantages of Reverse Mortgage 

1. High Fees and Costs

While reverse mortgages can be helpful, they often come with significant fees. These include origination fees, mortgage insurance premiums, and closing costs. Some of these costs can be rolled into the loan principal, but this means that your loan balance will grow over time. 

2. Impact on Government Benefits

A reverse mortgage could affect your eligibility for government benefits such as Supplemental Security Income (SSI) or Medicaid. Since the money from a reverse mortgage is considered a loan, it might be counted as an asset when determining your eligibility for certain programs. Be sure to check with a financial advisor before proceeding. 

3. Ongoing Home Expenses

Even though you don’t have to make monthly mortgage payments, you’re still responsible for other home-related expenses. This includes paying property taxes, homeowners insurance, and maintenance costs. If you fail to keep up with these payments, you risk violating the reverse mortgage agreement and facing foreclosure. 

4. Potential Heir Complications

When the homeowner moves out, sells the house, or passes away, the reverse mortgage must be repaid. This might mean that your heirs will need to sell the home to settle the loan. If the home has declined in value or there’s still a significant balance remaining, this could be a difficult situation for your loved ones. 

 

Good Candidate for a Reverse Mortgage 

While a reverse mortgage can be a great option for some, it’s not right for everyone. Here are some signs that a reverse mortgage might be a good fit for you: 

• You plan to stay in your home long-term: If you love your home and plan to stay there for the foreseeable future, a reverse mortgage can be a good way to access your home equity without the need to move. 

• You need extra money to cover daily expenses: If you’re struggling to make ends meet in retirement, a reverse mortgage can provide much-needed cash to help manage your costs. 
• Your home is increasing in value: If your home’s value is appreciating, a reverse mortgage may allow you to take advantage of that growing equity. 

 

Bad Candidate for a Reverse Mortgage 

A reverse mortgage isn’t for everyone. Here are some cases where it might be best to avoid this option: 

• You plan to move soon: If you’re thinking about moving in the near future, the costs of a reverse mortgage (including fees and interest) may not be worth it. 

• You’re struggling with other home-related expenses: If you’re already having trouble paying for property taxes or home insurance, a reverse mortgage might not be the best solution. 

• You expect major healthcare needs: If you think you might need to move to a nursing home or assisted living facility soon, a reverse mortgage could complicate things for you or your heirs. 

 

Consult with a Financial Advisor Today 

Deciding whether a reverse mortgage is right for you is a personal decision that requires careful consideration. While it can provide a much-needed financial lifeline in retirement, it also comes with risks and costs. Be sure to consult with a financial advisor or a professional like The Best Senior Services to fully understand how a reverse mortgage could affect your financial future. Talk to us!

 

FAQs 

What are the requirements for a reverse mortgage? 

To qualify for a reverse mortgage, you must be 62 or older, own your home, and live in it as your primary residence. You must also have enough home equity to meet the lender’s requirements. 

What are alternatives to a reverse mortgage? 

Alternatives to a reverse mortgage include home equity loans, home equity lines of credit (HELOCs), and selling your home to downsize. Government aid programs and annuities are also options for seniors needing financial assistance. 

How do I know if a reverse mortgage is right for me? 

If you’re 62 or older and want to supplement your retirement income while staying in your home, a reverse mortgage might be right for you. Consider factors like home equity, future housing plans, and your ability to cover ongoing costs. 

Is it a good idea to get a reverse mortgage? 

A reverse mortgage can be a good idea if you need additional income and plan to stay in your home long-term. However, it may not be ideal if you expect to move soon or struggle to manage home maintenance costs. 

What is the biggest problem with reverse mortgages? 

The biggest problem with reverse mortgages is the high fees and costs associated with them, including origination fees, closing costs, and mortgage insurance. These fees can reduce the overall amount of money you receive. 

Who is not a good candidate for a reverse mortgage? 

If you’re planning to move soon or are struggling to cover basic home maintenance costs, a reverse mortgage may not be right for you. Those with significant healthcare needs requiring relocation might also be better off considering other options. 

Who benefits most from a reverse mortgage? 

Homeowners aged 62 or older with significant home equity and a need for additional income in retirement can benefit most from a reverse mortgage. Seniors who wish to age in place and avoid monthly mortgage payments may find it particularly useful. 

What happens if you live too long on a reverse mortgage? 

If you live longer than expected, the loan balance may increase, but you won’t owe more than the home’s value due to the non-recourse nature of the loan. You can continue living in the home until you move, sell, or pass away. 

What happens when a person dies with a reverse mortgage? 

When a borrower dies, the reverse mortgage loan must be repaid, typically by selling the home. If there is any remaining equity, it can be passed on to heirs; if not, the home is surrendered to the lender. 

 

Firstly, a reverse mortgage allows older homeowners, those 62 years and older to borrow money. This type of mortgage utilizes the current home as collateral for the loan.  Even if you paid off your current mortgage, you can still borrow money. The loan value equals only a portion of the equity in the house while adding a tax-free income. In contrast to a traditional mortgage, where the homeowner pays the lender — a reverse mortgage rewards the homeowner.

There is no monthly payment due for homeowners who choose a reverse mortgage. Coupled with that, they can keep their home and can continue to live there. This is perfect for someone on a limited income in their older years. It is important to realize, that the loan must get repaid when the borrower dies, permanently moves out, or sells the home. Moreover, Home Equity Conversion Mortgage (HECM) remains backed by the government. This type of mortgage turns out as one of the most used reverse mortgages.

Qualifications for a Reverse Mortgage:

Accordingly, the primary homeowner must reach 62 years old or older to qualify for a reverse mortgage. And must also meet the following qualifying requirements:

• You must own the property outright or paid a significant portion of your mortgage.
• The house must serve as your principal dwelling.
• Borrowers must have a record of paying all federal loans and debts on time and up to date.
• The homeowner must provide all property taxes, homeowners’ insurance, and homeowner’s association dues for the applicant’s future budget.
• Applicants must attend an information session led by a reverse mortgage counselor. Also, the US Department of Housing and Urban Development (HUD) must approve the counselor.

How can you get a Reverse Mortgage?

If you own your home and are older than 65, you can qualify. Even if the mortgage has been paid off, you can still qualify. Although, homeowners sometimes are not able to borrow the entire worth of their home. The loan is still a very sizable amount for a person on a fixed income. Secondly, the 4 items below determine the principal limit:

1, The Age of the youngest borrower or eligible non-borrowing spouse
2. Current interest rates
3. HECM mortgage ceiling, the most you can borrow ($822,375 in 2021)
4. As well as the home’s valuation

The older homeowners usually have higher valued property and a lower interest rate. Thus, the greater the principal limit. If the borrower has a variable-rate HECM, the amount may increase. Options with a variable rate include:

• Monthly payments must be equal if at least one borrower resides in the property as their primary residence.
• Equal monthly payments for a set number of months agreed upon in advance.
• A line of credit to use until it runs out
• The loan will combine a line of credit with a fixed monthly payment. These payments may last for as long as one lives in the residence, or sometimes they paid back over a specified period of time.

You will get a single-disbursement, lump-sum payment if you choose a HECM with a set interest rate. Interest on a reverse mortgage accumulates each month. You will still need enough money to cover property taxes, homeowners’ insurance, and home maintenance.

In a Reverse Mortgage, who Owns the Home?

You continue to own your own home just like any other form of a mortgage. Nonetheless, when the borrower dies or moves, the full remaining balance will need to be paid.

According to Michael Sullivan, a personal financial adviser with nonprofit credit counseling and debt management service Take Charge America. He says, “If you can’t or won’t pay off the loan, the lender can sell your property. Of course, the lender may sell the property to reclaim the money owed by the borrower.” In most cases, if the house sold for less than the amount owed. The owners or beneficiaries are not responsible for any expenses.

What can you do with a Reverse Mortgage?

A spokesperson for the National Foundation for Credit Counseling suggests that reverse mortgages can help our seniors. Specifically, the appropriate uses of reverse mortgage funds can include the following:

• Supplementing retirement income
• Covering the cost of needed home repairs
• Paying out-of-pocket medical expenses.

Sometimes a person’s normal income or accessible savings is not enough to help them. A reverse mortgage can help supplement the gap. Utilizing a reverse mortgage can help them get more income with low fees. Therefore, it can sometimes prevent seniors from turning to high-interest lines of credit or loans.

Types of Reverse Mortgages:

Reverse mortgages come in a variety of forms and are tailored to a specific financial need of the borrower. Three different types are listed below:

 

1. HECM (Home Equity Conversion Mortgage:  The Home Equity Conversion Mortgage remains a popular sort of reverse mortgage (HECM). These federally insured mortgages have significant upfront charges. The benefit of this type of loan is that the homeowner can use the funds for anything. You can also pick how to receive the money, such as through fixed monthly payments or a credit line (or both options simultaneously.) Although widely available, HECMs are only available through FHA-approved lenders. Also, all borrowers must acquire HUD-approved counseling before closing.
2. Proprietary reverse mortgage:  Most of these types of loans are not backed by the government. This type of reverse mortgage typically offers a higher mortgage advance, particularly if your assets are worth more.
3. Single-purpose reverse mortgage:  Single-purpose reverse mortgage continues to remain the standard choice over the other two mortgage options. Usually issued by nonprofits and state and local government agencies. This type of mortgage turns out to be the most reasonably priced as well. However, it usually has a much lower amount loaned than the other choices. And homeowners can only use the loan for one specific purpose, such as a handicap-accessible redesign.

The Maximum Amount of Money you can get from a Reverse Mortgage:

According to Boies, the below criteria determine the amount of money you can collect from a reverse mortgage:

• The current market value of your property
• The age of the borrower
• Interest rates
• Which type of reverse mortgage do you want
• Related charges and fees
• Your financial assessment
• Additional mortgages or liens you may have
• Including any balances of a home equity loan
• A home equity line of credit (HELOC)
• All tax liens or judgments on the property
• The cost of a reverse mortgage?

Reverse mortgages include a lot of added costs. One of these costs consists of the closing expenses. The borrower will incur charges for a reverse mortgage. These charges among others aren’t inexpensive but do add up. The majority of HECM mortgages allow you to roll the costs into the loan. By doing this you don’t have to pay them up-front. They are added to your total amount borrowed. However, doing so reduces the amount of money you can borrow through the loan.

According to HUD, the Following Lists a few of the HECM Fees:

MIP (mortgage insurance premiums) – Closing requires a 2% initial MIP. As well as, a yearly MIP of 0.5 percent of the outstanding loan balance. The MIP cost can be factored into the loan for the borrower.

• Origination cost – Lenders charge the greater of $2,500 or 2% of the first $200,000 of your home’s worth. Additionally, they add 1% of the amount over $200,000, to originate your HECM loan. Most importantly, the loan has a restriction, for example, it has a $6000 Maximum cost restriction. Loan restrictions help the borrower by keeping the overall cost down.

 

• Servicing costs – For the life of the loan, lenders might charge a monthly fee. This monthly fee will include the managing fee and a fee to monitor your HECM. For loans with a fixed rate or an annually increasing rate, monthly servicing fees cannot exceed $30, or $35 if the rate adjusts monthly. This limits the borrower from having additional fees added to the loan.

 

• Third-party fees – Additionally, you may incur fees for the appraisal and home inspection, a credit check, title search, and title insurance. As well as possibly a recording fee may be charged. These types of charges occur by a third party and are listed as fees on your statement.

In conclusion, keep in mind that some reverse mortgages have higher interest rates. This can increase your charges and fees. The rates are subject to the lender, your credit score, and other factors. So, let one of our experts help you get your Reverse Mortgage at the best possible interest rate.  Our experts will save you money and ensure you get the very best Reverse Mortgage.