A reverse mortgage is a loan based on the current paid-up value or equity in your home. Instead of making a monthly mortgage payment, your lender can use your equity to pay you a set monthly amount (in regular monthly payments starting at $1,000 or quarterly payments starting at $3,000) or pay out a lump sum to you. While gaining access to this money sounds great, it’s essential to understand how a reverse mortgage works to avoid any pitfalls.How does a reverse mortgage work?When you have a regular mortgage, you pay the lender every month so you can eventually own your home outright. With a reverse mortgage, you get a loan in which the lender pays you. Reverse mortgages use part of the equity in your home and convert it into payments to you. You do not need to pay back this loan until you move, sell the home, or pass away. When you (or your heirs) sell the home, the reverse mortgage loan balance is deducted from the proceeds of the sale. Any balance remaining from sale proceeds reverts to you or your heirs.What can you pay for with a reverse mortgage? Here is a short list of expenses you can pay for with funds from a reverse mortgage:
- Supplement your lifestyle
- Stay in your home and avoid having to move, sell or downsize
- Help relatives financially
- Increase monthly cashflow
- Pay off high interest debts
- Buy another property
- Cover health expenses, including in-home care
- Renovate your home
- Travel more often
There are no stated constraints for how you use the money. But that doesn’t mean you should run right out and get one. Be sure to read the pros and cons to understand if this financial tool makes sense for your situation.How do I qualify for a reverse mortgage?Prepare to shop around for the right type of reverse mortgage to suit your situation. If you meet all of these qualifications, a reverse mortgage might meet your needs:
- All loan holders must be age 55 or older.
- You must own your home outright or have just one mortgage which you are the borrower.
- You’ll be required to pay off the existing mortgage using the proceeds from your reverse mortgage.
- The home must be your primary residence.
- You must be current on all property taxes, homeowners’ insurance, and other mandatory legal obligations (like HOA dues).
- Your home must be maintained and in good condition.
How much money can you get from a reverse mortgage?The amount of money you can access from a reverse mortgage will vary with the amount of equity you have in your home, your age, the home’s current market value, current interest rates, and the specific type of reverse mortgage. If you have another loan, lien, or outstanding balance on your home equity line of credit, you will be required to pay the outstanding balances first with any funds you received from a reverse mortgage. The obligation includes any property tax liens, or contractor, or other private liens. How much does a reverse mortgage cost?The costs and terms for a single-purpose reverse mortgage and a proprietary reverse mortgage can vary. You’ll want to shop around with different agencies and mortgage lenders to find the most favorable terms. Costs for reverse mortgage loans are well-documented. However, you will not need to pay loan costs out of pocket because the costs can be covered by loan proceeds, which will reduce the net loan amount available for expenses. Reverse mortgage pros and consPros:
- A reverse mortgage can give you financial options and additional income during retirement.
- If the primary loan holder passes away, the spouse can stay in the house and continue to receive payments from the loan.
- You don’t have to make monthly mortgage payments.
- Depending on the type of reverse mortgage, your funds can be used for any expense.
- It can be used as a way to stop or prevent foreclosure and loss of the home.
Cons:
- You will owe more over time due to interest on the loan.
- You could lose your home if you don’t maintain payments for property taxes and insurance.
- You reduce the equity in your home because you are, in effect, lending it to yourself.
- The upfront cost of a reverse mortgage can be thousands of dollars.
- Your heirs may not be able to keep the home if they can’t afford to pay off the loan.
Is a reverse mortgage a good idea? While a reverse mortgage involves certain complications, it can be an excellent way to supplement your income during retirement, pay for medical expenses, or home improvements that allow you to age in place. As with any loan, it makes good sense to shop around for the best terms and fees. Guidance from an accredited reverse mortgage agent can help you make the best choice.