Getting a Reverse Mortgage on Your Home

What is a Reverse Mortgage?

A reverse mortgage (also known as a home equity conversion mortgage) is available to homeowners who are at least 62 years old. At this point, many homeowners hold a large amount of equity in their homes. Rather than selling the property to get that cash, one option to receive extra funds is through a reverse mortgage. To qualify, most lenders require that you hold at least 50% equity based on the current appraised value rather than the original purchase price.

By leveraging that home equity, senior homeowners can receive payments from their lender in one of three ways:

• Lump sum
• Fixed monthly payments
• Line of credit

It’s also possible to mix and match some of these elements for a more customized financing deal.

The key differentiator between a reverse mortgage and any other type of home loan is that you as the borrower don’t have to make any loan payments. You do, however, need to keep up with expenses such as property taxes and homeowners insurance.

Rather than paying the lender each month, the loan becomes due when you either die, move from the property, or sell your home. Since the loan amount can’t exceed your home’s value, your estate isn’t responsible for paying extra if the sale of the home doesn’t cover the balance due.

Interest does accrue during the life of the loan, which does impact you. While you don’t make payments on that interest, it is added to your loan balance. Consequently, over time your loan balance increases and you also have less equity in your home. There are definitely advantages and disadvantages to a reverse mortgage, which we’ll dive into next.

Pros and Cons

One of the major advantages of a reverse mortgage is that it can help retirees pay for their everyday living expenses when income is limited. However, even homeowners over the age of 62 in affluent areas with expensive homes can use this as a tool to cash in on their equity without having to move.

With a reverse mortgage, you’re able to continue to living in your home while still being able to afford your other day to day expenses. You can keep living there until your death and can even move into a nursing home or assisted living facility for up to a year without having to address the loan.

As with all things, there are a few downsides that come with a reverse mortgage.

While you do receive cash in exchange for your home equity, you also spend a lot of that money on interest and fees associated with the loan. While a reverse mortgage may be useful for long-term sustainability, it’s a costly tool if you’re just trying to address a short-term need.

Another issue is that if someone else lives with you who is not a co-borrower, they must leave your home after your death (unless your heir pays off the reverse mortgage). Finally, consider all of the potential outcomes, especially if your reverse mortgage has a limit. In many cases, the loan may come due after a certain number of years, regardless of whether or not you’re still living. If you end up living longer than expected, you may have very limited resources if you rely solely on a reverse mortgage.

How to Pick a Reverse Mortgage Lender

First, check to make sure a potential reverse mortgage lender is licensed to do business in your state. In addition to local lenders, there are plenty of large loan companies that operate nationwide. As you compile your list and begin to narrow down the options, look online for reviews on third party sites.

Testimonials on a lender’s page are definitely cherry-picked to highlight the best customer experiences. A broader search can give you better insights on what to actually expect from a specific lender.

Before you even request a reverse mortgage quote, ask the lender a few key questions. Your interview should confirm how experienced they are with reverse mortgages and what they consider the disadvantages of a reverse mortgage to be.

The answer to that second question gives you a better idea of how much the loan officer personally invests in his or her clients. They should accurately represent the risks of a reverse mortgage, otherwise you can tell they’d do just about anything to close a deal.

Finally, compare offers from your final selection of lenders. Different variables you’ll see include:

• Interest rate
• Closing costs
• Servicing fees
• Closing time

Evaluate all of the terms and conditions to make sure you’re not accumulating more debt than necessary as part of your reverse mortgage.

Other Ways to Finance Your Retirement

If you’re wary of taking out a reverse mortgage or it simply doesn’t fit your estate plans, consider some of these alternatives. Some still involve risk, so research your options carefully before making a final decision.

Home Equity Loan

If you’re considering a reverse mortgage, you almost certainly have enough equity to qualify for a home equity loan. If you also have good credit, you’re also likely to qualify. A home equity loan is the same as a second mortgage, and provides you with a one-time lump sum of cash. You’ll then repay the loan over a fixed period with monthly payments. The home is still used as collateral for the loan, but you still get to keep it as an asset as long as you keep up with your payments.

Home Equity Line of Credit

This is similar to a second mortgage, but you can draw on an account as needed rather than getting a large amount of cash at one time. This can be helpful for retirees in a number of situations, such as those who rely on investment returns for their living expenses.

In a down market, your retirement income may be limited. Alternatively, you may be comfortable with day to day expenses, but not emergencies like sudden home repairs. Having that access to capital through a HELOC can help in these situations.

Downsize Your Home

For a risk-free alternative to borrowing against the equity in your home, you can always consider selling it and moving to a less expensive home. Many retirees prefer a livelier atmosphere in a condo or walkable community, particularly after children are grown and large house is less of a necessity. While this is certainly an emotional and personal decision, it’s one to consider in order to maximize your finances during retirement.

Frequently Asked Questions

by Lauren Ward

Personal Finance Writer

Lauren Ward is a personal finance writer with nearly ten years of experience covering topics like loans, credit, and real estate. She lives in Virginia with her husband and three children.