How’s retirement treating you? If you would like cash to supplement your retirement income, did you know your home can be a resource?
Many seniors’ single largest asset is their home, yet a house is often the last thing that people want to sell. By using a Reverse Mortgage as part of your retirement strategy, you can borrow against your home’s equity and “cash out” -- while staying right in your home.
Take some time to explore the pros and the cons of a reverse mortgage - and everything in between.
General Requirements to Qualify for a Reverse Mortgage
Before considering a reverse mortgage, you should first confirm that you meet a few basic requirements. To obtain one, you must:
- Be age 62 or older
- Own your home (outright or with a mortgage)
- Use the home as your primary residence
Who is a Reverse Mortgage Right For?
A reverse mortgage may be right for any senior who meets the above requirements and wants supplemental income. It may be an especially attractive option if you’re living on a fixed income and trying to navigate rising costs due to inflation. You don’t necessarily have to be retired, although many applicants are.
Pros of a Reverse Mortgage
If you’re considering ways to supplement your income and/or to utilize your home’s equity, there are several pros of reverse mortgages:
- You Get to Stay in Your Home: A reverse mortgage allows you to continue living in your home. There’s no need to move, and you also retain the title to your house.
- Additional Income Stream: Most reverse mortgages make regular payments against your built-up equity. These payments can be a reliable monthly supplement to your income.
- Generally, Not Counted as Taxable Income: Reverse mortgages generally don’t invoke any taxable action, as you’re simply accessing equity that was built up with your taxed income. Because taxation is situation-dependent, you should always consult a qualified tax professional for confirmation.
- Your Out-Of-Pocket Expenses Will be Minimal: Reverse mortgages can be structured so that closing costs are financed into the mortgage itself.
Cons of a Reverse Mortgage
There are some aspects of reverse mortgages that you should be aware of:
- Still a Loan: A reverse mortgage is still a loan product. Like any loan, interest and fees will compile over time.
- Smaller Inheritance: Since you’re tapping into your home’s equity, you’ll have less to leave to your loved ones – such as children, grandchildren, or others. Additionally, they will be responsible for the reverse mortgage if you do leave the house to them. (Most people in this situation manage this obligation by refinancing or selling the house).
- Other Options Have Potentially Lower Fees: There may be other loan products with lower fees available to you. Always do your own research and practice due diligence when considering any loan option. Talk to a specialist you trust so they can help you explore all your options.
You’re Not Free of Obligations
With a reverse mortgage, you remain the homeowner. This has great benefits (such as staying in the home), but it also comes with certain responsibilities. You’ll continue to be responsible for maintenance, property taxes, applicable association fees, and other ancillary costs. You also must keep the property insured per the stipulations of the reverse mortgage agreement.
Most reverse mortgages require that you keep the house in a comparable condition to its condition when financed. That usually includes everything from fixing a leaky faucet or worn-out lock, to replacing the roof and resealing the driveway.
Keep in mind, however, you’ll have extra income to help with these various fees and obligations. A reverse mortgage may provide just the supplemental income you need to manage a major repair or pay your tax obligations, which you’d have to pay anyway.
How Reverse Mortgage Funds Are Distributed
While many applicants choose to receive their reverse mortgage funds as monthly payments, you have other options. Depending on your situation, you can choose to:
- Receive regular monthly payments for a defined period
- Receive a one-time lump sum payment
- Access a line of credit on an as-needed basis
- Receive a combination of the above options
Repayment of a Reverse Mortgage
Like all loan products, a reverse mortgage must eventually be repaid. The reverse mortgage’s balance becomes “due” when a “maturity event” occurs. Examples of a maturity event are as follows:
- You relocate to a different primary residence
- The last surviving borrower passes (usually you or your spouse)
- You fail to meet the loan obligations (as outlined above)
- The period for monthly payments reaches its termination
How Do Reverse Mortgages Perform with Market Fluctuations?
A reverse mortgage is intended to be reliable, and thus is structured to your benefit with regard to real estate market fluctuations:
- Depreciation: Should the house depreciate in value, neither you nor your heirs are responsible for any excess loan amount. The maximum repayment due is the home’s current value when a maturity event occurs.
- Appreciation: You retain any added appreciation in your house. Should the home increase in value, the increase above your reverse mortgage's balance due is yours (or your heirs’) to keep.
Ready to Take the Next Step
If you’re 62 or older and own your home, a reverse mortgage may be a good fit for you and your family’s needs. If you are ready to have a conversation about the next steps, request a consultation and explore your options.
Want to learn more? Check out this related article: How to Decide if You Should Stay in Your House or Move.