As the cost of living continues to rise, managing expenses on a fixed retirement income can become challenging. When your income is relatively stable but everyday costs continue to increase, you may start looking for other ways to create additional cash flow.
One option some homeowners consider is a reverse mortgage.
A reverse mortgage allows eligible homeowners to convert a portion of the equity they have built in their home into funds they can use for a variety of purposes. Instead of making a traditional monthly mortgage payment, the loan can provide access to equity through options such as a lump sum, monthly payments, a line of credit, or a combination of these options.
Who Can Qualify?
For a Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, the homeowner must generally be at least 62 years old and meet other eligibility requirements.
The process also includes counseling with an FHA-approved reverse mortgage counselor. This is an important part of the process because it gives homeowners an opportunity to understand how the loan works, what the costs and responsibilities are, and what alternatives may be available before making a decision.
We do offer proprietary non-HUD reverse mortgages for people as young as 55 years old (not available in all states).
Your Home Equity Matters
One of the first things to consider is the value of your home compared with the balance remaining on your existing mortgage.
When you obtain a reverse mortgage, the existing mortgage generally must be paid off as part of the transaction. The reverse mortgage proceeds can be used for that purpose, with any remaining available proceeds going to the homeowner according to the selected payment option.
For example, imagine your home is worth $1,000,000 and you currently owe $200,000 on your existing mortgage. If you qualify for a new reverse mortgage with $400,000 available in proceeds, the existing $200,000 mortgage would be paid off first.
That would leave $200,000 in remaining reverse mortgage proceeds, before applicable costs and fees, that could potentially be available to you according to the terms and payment option you select.
This is why understanding both your home’s value and your existing mortgage balance is an important part of evaluating whether a reverse mortgage could make sense for you.
How Can the Money Be Used?
Once the existing mortgage has been paid off, the remaining proceeds can generally be used for purposes that are important to you.
Homeowners may use available funds to supplement retirement income, pay other debts, make home repairs, purchase a vehicle, establish an emergency fund, or help with other financial needs.
Some homeowners may also choose to use their available equity as part of a broader financial plan.
What About Your Home?
A reverse mortgage does not mean that you give up ownership of your home.
You remain responsible for meeting the requirements of the loan, which generally include living in the home as your principal residence and keeping up with property taxes, homeowners’ insurance, and required maintenance.
The loan generally becomes due when the last borrower dies, sells the home, or no longer lives in the home as a principal residence, subject to the terms of the loan and applicable requirements.
It is also important to understand how a reverse mortgage may affect your estate. Using home equity can reduce the amount of equity available to heirs. However, eligible heirs generally have options to satisfy the loan and retain the property, subject to the loan terms and the amount owed.
Learn More About Reverse Mortgages
For more information about how reverse mortgages work, including the features, requirements, costs, and responsibilities, see the Reverse Mortgage Booklet.
A reverse mortgage is a significant financial decision and is not right for everyone. Understanding how the loan works, the costs involved, how it may affect your retirement strategy and estate, and what alternatives are available can help you determine whether it makes sense for your situation.