With a reverse mortgage, a senior homeowner can withdraw a large chunk of the equity in their home for cash, spend it how they wish and wait to pay it back.
Reverse mortgages are special types of home loans that are available to homeowners aged 62 and older. Unlike home equity loans, with a reverse mortgage you can wait to repay it until after you leave your home. Leaving your home could simply mean no longer using the house as your principal residence, selling or relocating to a new home, or moving to a senior living facility, or upon the homeowner’s death.
Many seniors may turn to reverse mortgages for an infusion of much-needed cash, strengthening their monthly budgets and giving them a greater sense of financial security from month to month. You may use the money from a reverse mortgage to bolster your Social Security benefits, which may not be enough each month.
You may turn to a reverse mortgage for help in dealing with the diagnosis of a long-term illness for yourself, or a loved one, which may require money beyond their current income or for help in dealing with the costly aftermath of a lengthy hospital stay and its subsequent recovery.
For example, you may need to pay for additional people to help you at home, in-home aides, someone to help with laundry, meals and housekeeping. And your health insurance may not cover the full extent of your on-going medical costs and expenses.
Other people may decide to take out reverse mortgage to simply pay for home repairs or home improvements. The money could be available in a lump sum in a single disbursement, through a line of credit or monthly cash advances or a combination of a line of credit and monthly payments.
With a reverse mortgage, you keep the title of your home and you are still responsible for paying property taxes, homeowner’s insurance and maintaining your home, so it’s not as if your homeowner costs vanish, as convenient as the cash may seem.
In general, with reverse mortgages, the older you are and the greater the equity that you have in your home, the more money you can receive. How much you can borrow with this type of mortgage depends on a homeowner’s age, the type of reverse mortgage you choose, the appraised value of your home, available interest rates and a financial assessment of your ability to continue to pay property taxes and homeowner’s insurance.
The amount you owe with a reverse mortgage comes due when the homeowner dies, sells the home, or no longer lives there as a principal residence. Most of this loan type have a “non-recourse” clause, which means you or your estate if you should you die while living there, would owe no more than the value of your home.
A reverse mortgage may be a good option for people who own their own home and have few if any other savings to tap or for those simply looking to get some additional cash for expenses. But it is important to consider your individual situation carefully and to understand the pros and cons of a reverse mortgage. Seniors with other assets may wish to tap those instead and leave their home and its full equity as an inheritance for their heirs.
Here is a look at the pros and cons of getting a reverse mortgage as a senior homeowner.
Advantages of reverse mortgages
Tapping home’s equity for cash. Converting some of the equity in your home to cash through a reverse mortgage is a key advantage and selling point for these types of home loans. You’ve got equity in your home but you’re short of cash. A reverse mortgage is one way to convert that equity into cash.
Tax-free money. Believe it or not, the money you receive through a reverse mortgage is tax-free, an advantage for people with limited incomes. Rather than income earned, a reverse mortgage is considered a loan advance so the money you receive through a reverse mortgage isn’t subject to taxes.
No impact on federal benefits. Getting a reverse mortgage will not affect your eligibility for Social Security or Medicare so you can tap into the equity in your home and bolster your monthly budget and not impact those important federal programs.
Disadvantages of reverse mortgages
Fees. With a reverse mortgage, you will pay an origination fee as well as closing costs and continuing servicing fees. So there are plenty of costs to consider when tapping your home’s equity through a reverse mortgage.
Interest adds up. As you receive money through a reverse mortgage, interest gets added to the balance you owe so the amount you owe through a reverse mortgage increases over time. Some reverse mortgages have fixed rates and other come with variable rates. With a variable rate reverse mortgage, an increase in interest rates will increase the interest you pay on your reverse mortgage, bumping up your overall balance.
Fewer assets. A reverse mortgage could use up much of the equity in your home, leaving fewer assets for you and your heirs. So you and your descendants will have less outright value in your home after signing on for a reverse mortgage.
Shop smart for a reverse mortgage
If you think a reverse mortgage may be right for you and your family. It is important to shop around. Consider offers between lenders carefully. You’ll also want to learn more about the different types of reverse mortgages.
Single purpose. Single-purpose reverse mortgages are available from some state and local government agencies and non-profit organizations. These types of reverse mortgages may only be used for specific purposes such as home repairs and home improvements.
Proprietary. Proprietary reverse mortgages are private loans back by companies that develop them. Homeowners with high value homes may qualify for more cash through a proprietary reverse mortgage.
Home Equity Conversion Mortgage (HECM). These federally insured reverse mortgages are backed by the U.S. Department of Housing and Urban Development. Before applying for this type of reverse mortgage, you must meet with a counselor from a government-approved housing counseling agency.