Reverse Mortgage 101

Simply put, a reverse mortgage is a loan that enables homeowners who are age 62 or older to convert a portion of their home’s equity to the lender in return for cash. When choosing a reverse mortgage, the borrower will be given the option to receive cash value of the equity in the form of a lump sum or in monthly distributions. The loan is then repaid to the lender when the borrower or their heirs sell the property.

For many seniors, reverse mortgages have become a useful retirement planning tool, solving a spectrum of needs, including:

  • Providing supplemental retirement income;
  • Covering daily living expenses;
  • Paying for health care or caregiver expenses;
  • Repairing or modifying a home;
  • Paying off debts;
  • Covering property taxes;
  • Preventing foreclosure.

What conditions must be met to qualify for a reverse mortgage?

To qualify for a reverse mortgage, you must:

  • Be at least 62 years old;
  • Own your home outright;
  • Have enough resources or income to pay any ongoing costs, which include the property taxes, utilities, HOA fees and home insurance;
  • Be able to manage the continued ongoing general maintenance of the home, including roof replacement, water heater, heating and A/C systems, appliances, etc.
  • Be current on your property taxes and hazard premiums.
  • Not be delinquent on any federal debts.
  • Be using the reverse mortgage for your primary residence.

    What are some of the most common ways to use a reverse mortgage?

    Reverse mortgages can be used in a variety of ways:

  • Supplemental Income. The monthly proceeds of a reverse mortgage can supplement income.
  • Monthly Expenses. A reverse mortgage can cover unexpected monthly expenses or simply make life more comfortable.
  • Fill the Gap until Social Security. A reverse mortgage line of credit can fill the gap between age 66 and 70 with tax-free income, grow in value and let 401(k) and other assets remain untouched during that timeframe.
  • Financial Security. A powerful feature of a reverse mortgage is the line of credit. This line of credit can replace lost income for a senior who has lost a job and is seeking another before drawing on Social Security and other benefits.
  • Caregiving. According to research, most seniors prefer to stay in their home during retirement. Proceeds from a reverse mortgage can assist with the cost of long-term home care.

How much can you get with a reverse mortgage?

Several factors determine how much money you can get through a reverse mortgage:

  • Your age (or, in the case of couples, the age of the youngest spouse);
  • Your home’s value;
  • Interest rate;
  • Lesser of appraised value or the HECM FHA mortgage limit of $679,650.

Usually you can take up to 60 percent of your initial principal limit in the first year of a reverse mortgage.

What are some important things to know about a reverse mortgage?

The most important thing to note is that by opting for a reverse mortgage, you are decreasing the amount of available equity in your home. That can mean that there may come a point when there may not be any inheritance left from the home to pass on to your heirs. However, the pressures of being able to pay off all of your bills may be a priority over equity preservation.

Leveraging a reverse mortgage can be a smart move for many older borrowers looking to establish a safe, cost-effective route to retirement security. For those who don’t want to accumulate additional credit card debt, or rely on their adult children for supplemental income to cover basic living expenses, a reverse mortgage could be the answer. When you consider the soaring home prices that have given many residents large amounts of equity to work with, it may not be such a bad idea to use a reverse mortgage in lieu of more expensive financing options. Not to mention that, unlike home equity lines of credit, reverse mortgages do not require the borrower to repay principal or interest until the sale of the property and can never be frozen by the lender.

If you feel that converting some of your home’s equity into supplemental income via a reverse mortgage could be a viable option, contact us to learn more.