If you are near retirement age and need additional cash, a reverse mortgage loan can be a useful financial tool to increase your monthly income. You’ll need to meet a few requirements such as being of retirement age and having a significant amount of equity in your home, but if you are eligible, you’ll be able to take that equity and exchange it for cash payments. In the majority of cases, you can then use the funds for any expense you see fit.
Reverse mortgages can be a beneficial source of income if you’re having a tough time paying for things like medical bills, car repairs, or other expenses. With that being said, a reverse mortgage may not always be the best option.
To help you work through reverse mortgage pros and cons in figuring out if they’re a good choice, we’ll go through the details of how they work as well as some alternatives you can consider.
What is a reverse mortgage?
As a homeowner, a reverse mortgage is a loan that allows you to trade your home equity for cash. You get to retain ownership of the home, continue living there and do not have to make any payments on the loan until you decide to sell or move out of the property.
In many ways, it is the opposite of a traditional mortgage. With most traditional mortgage loans, you are required to make monthly payments to a lender. With each payment, the loan balance goes down, and your equity in the home grows.
On a reverse mortgage, however, the lender makes payments to you. Over time, the amount owed to the lender continues growing, which tends to decrease the amount of equity you have in the property.
Different types of reverse mortgages
The most common type of reverse mortgage is a Home Equity Conversion Mortgage (HECM). It’s a government-insured loan, so you’ll likely find the requirements are similar regardless of which lender you choose.
The other two types of reverse mortgages are less common. Single-purpose loans are offered locally, and non-HECM/private reverse mortgages are also available for those who may not qualify for a HECM reverse mortgage.
When should you get a reverse mortgage?
If you need additional cash, are of retirement age, have a significant amount of equity, and are not worried about who will be inheriting the property, you could be a good candidate for a reverse mortgage. For most folks, the cash obtained from a reverse mortgage loan can be used for any number of expenses. This can include things like medical bills, car repairs, home repairs, and monthly expenses like groceries and food.
Reverse mortgage pros
Getting a reverse mortgage can have many benefits. The cash you receive is tax free, you can have flexibility on what the funds can be used for, and do not have to make any payments until you decide to move or sell the property.
Monthly stream of tax free income
One of the biggest benefits of a reverse mortgage is having an additional source of monthly income, tax free. This can be especially helpful if you’re on a fixed income or otherwise unable to earn more cash to help with your monthly expenses. The extra income you receive from a reverse mortgage can also be saved for expenses you might incur later in the year, such as future car or home repairs.
In most cases, there are no restrictions on what the income can be used for
The most common type of reverse mortgage, a HECM, has no restrictions on what you can use the money for. Once you receive the cash, you can spend it as you see fit, and do not have to obtain approval from the lender. On the other hand, a single-purpose loan, which is the least common type of reverse mortgage, does require a lender’s approval, and can only be used for a specific purpose.
No monthly loan payments required
A reverse mortgage allows you to obtain additional cash without needing to make any monthly loan payments to a lender. Although the balance owed does grow each month, you do not have to worry about repayment to the lender until you decide to sell or move out of the property.
You retain ownership of the home
Getting a reverse mortgage won’t change who owns the home. In fact, the process is pretty similar to that of a traditional mortgage loan. You’ll stay on title as the legal owner, while the lender places a lien on the home. The lien allows the lender to use the home as collateral for the loan. In the event you breach any of the loan terms, the lien gives the lender the right to begin foreclosure proceedings.
You do not have to relinquish occupancy of the property
Getting a reverse mortgage does not mean you have to live somewhere else. In fact, most reverse mortgages require you to continue occupying the home as your primary residence.
Reverse mortgage cons
Although getting a reverse mortgage has many benefits, there are also some down downsides to consider. Fees are involved, you may lose equity in your home, and it could affect your eligibility for other government assistance programs.
Closing costs to obtain a reverse mortgage can be high
A reverse mortgage tends to be significantly more costly than a traditional mortgage loan when it comes to both the interest rate and closing costs. In addition to having to continue paying for things like property taxes and homeowner’s insurance, some fees that you may have to pay can include:
- Reverse mortgage counseling (varies by lender and location)
- Origination fee
- Appraisal fee
- Title search fee
- Home inspection fee
- Credit report fee
- Government recording fee
- Mortgage insurance premium (may be charged annually and as a one-time cost of the loan)
Your heirs receive less home equity
Home equity is calculated as the value of the home, minus any loans against the property. Since a reverse mortgage trades your home equity for cash payments, you’ll generally have less and less equity in your home as time goes on as your loan balance increases each month.
If you have heirs or anyone else you wish to inherit the property, they’ll have to find a way to pay off the loan, except non-borrowing spouses since they too have protection rights with a reverse mortgage. If the balance of the reverse mortgage is too high in relation to the value of the home, it could affect their ability to retain ownership of the property.
Income received from a reverse mortgage may affect your eligibility for other government sources of income
The income you receive from a reverse mortgage could affect your eligibility to receive other types of government assistance or income, such as social security or medicare. You’ll need to check the terms of the specific government income you’re receiving to determine whether this is the case and how it could impact your finances.
You can lose the home if you fail to meet the loan requirements
Getting a reverse mortgage means allowing the lender to place a lien on your home. This lien allows the lender to potentially foreclose on the property if you do not maintain the terms of the agreement.
For a traditional mortgage, this usually involves an agreement to make regular monthly mortgage payments. If the homeowner fails to make payments, the lender can foreclose and take ownership of the home.
On a reverse mortgage, this can involve an agreement to live in the home and maintain the property in good condition. You’ll also need to stay current with your property taxes and homeowners insurance.
What are the restrictions to getting a reverse mortgage?
To qualify for a reverse mortgage, you’ll have to be age 62 for a government-insured HECM reverse mortgage or 55 for a non-HECM reverse mortgage issued by a private lender. Other requirements may apply depending on the specific type of reverse mortgage loan you’re applying for.
HECM reverse mortgages
A HECM loan is insured by the Federal Housing Administration, so the eligibility requirements should be similar regardless of which lender you choose:
- You must be at least 62 years old;
- Must occupy the property as your primary residence;
- Property must be in good condition
- Must own the home free and clear (or have a significant amount of equity based on the value of your home);
- Must pay off any federal debt owed (such as income taxes or student loans);
- Must have sufficient funds to pay ongoing expenses such as property taxes and insurance;
- Complete a HUD-approved counseling course
Non-HECM proprietary reverse mortgages
With a lower age requirement, private reverse mortgages can be a good alternative if you don’t qualify for a government-insured loan. Since these are not insured by the government, you may find that specific requirements may vary among lenders, but generally involve the following:
- Must be age 55 or older (may be higher in select states);
- Must occupy the property as your primary residence;
- Must have at least 50% equity in the home;
- Homeowner to complete an approved reverse mortgage counseling course;
- Sufficient residual income from monthly cash flow to meet continuing financial obligations (such as home maintenance and repairs);
- A minimum credit score of 620
Single purpose reverse mortgages
This type of loan can be difficult to find as they are only offered through specific local or state organizations. As a result, specific requirements can vary greatly, but you’ll generally need at least the following:
- Must age at least age 62;
- The homeowner must identify a qualified expense that the reverse mortgage proceeds will be used for
Where can I get a reverse mortgage?
Not every reverse mortgage lender may offer the specific type of loan you’re looking for. To give you a head start and save you time in your research, here are some lenders that offer different types of reverse mortgage products:
Age 55+ reverse mortgage lenders:
- Finance of America Reverse
- Reverse Mortgage Funding
Age 62+ reverse mortgage lenders
- Open Mortgage
- Mutual of Omaha
- American Advisors Group
- Check with your local Area Agency on Aging
What are alternatives to reverse mortgages?
Since reverse mortgages can reduce your home equity and have a negative impact on how much your heirs will receive after you pass away, it might not necessarily be the best option if you’re looking for access to cash. You should weigh the pros and cons, as there could also be more cost effective alternatives to access your home equity that can save you money while still fulfilling your needs.
- Home equity investments: No monthly loan payments are required, as long as you agree to give up a percentage of your home’s future increase in value.
- Home equity loan: This is a second mortgage on your home that allows you to tap your home equity for cash. You’ll have to make monthly loan payments and meet the lender’s requirements for things like credit and income. If you do qualify, you will receive a lump-sum of cash with no restrictions on how it can be used.
- HELOC: Similar to a home equity loan, but is a line of credit with a variable interest rate that has the flexibility to continue drawing funds up to the lender’s specified credit limit. Monthly payments are required.
- Cash-out refinance: Replaces your existing mortgage and allows you to obtain a lump sum of cash that can then be deposited to a bank account of yours to be used on anything you need. Monthly payments are required.
Reverse mortgage pros and cons — any remaining questions?
If you have any questions after reading this essay, let me know in the comments below! We do our best to answer and respond to everyone’s comments