Reverse Mortgage: Tapping Your Home Equity in Retirement
A reverse mortgage allows older homeowners to convert a portion of their home equity into cash, providing a valuable income stream during retirement.
Can I use my home equity to get extra cash in retirement?
Definition
A reverse mortgage is a special type of home loan that allows homeowners aged 62 and older to access the equity they’ve built up in their homes. Unlike traditional mortgages where you make payments to the lender, with a reverse mortgage, the lender makes payments to you. The loan is repaid when the borrower sells the home, moves out, or passes away.
Why Would I Consider a Reverse Mortgage?
Many seniors find themselves “house rich and cash poor.” They own their homes outright or have significant equity, but their regular income in retirement isn’t enough to cover living expenses, healthcare costs, or unexpected emergencies. A reverse mortgage can be a financial tool to help bridge that gap, offering a way to supplement retirement income without having to sell the family home.
How Does a Reverse Mortgage Work?
The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration (FHA). To qualify for a HECM, you must:
- Be 62 years of age or older.
- Own your home outright or have a substantial remaining mortgage balance that can be paid off with the reverse mortgage proceeds.
- Live in the home as your principal residence.
- Have the financial assessment and counseling.
- Maintain the home and pay property taxes and homeowners insurance.
With a HECM, you can receive the loan proceeds in several ways:
- A lump sum: A single payment for a set amount.
- Monthly payments: Regular installments for a fixed term or for as long as you live in the home.
- A line of credit: Draw funds as needed, similar to a credit card.
- A combination of these options.
The loan balance grows over time as interest and fees accrue. Importantly, HECM reverse mortgages are non-recourse loans, meaning you or your heirs will never owe more than the value of the home at the time the loan is repaid, even if the loan balance exceeds the home’s value.
Real-World Examples
- Supplementing Retirement Income: Sarah, 70, owns her home free and clear. Her Social Security and a small pension aren’t quite enough to cover her monthly bills and medical expenses. She gets a reverse mortgage and chooses to receive monthly payments, which helps her live more comfortably without worrying about depleting her savings.
- Paying for Healthcare: John and Mary, both in their late 60s, need to make significant home modifications for an aging parent who will live with them. They take out a reverse mortgage to fund the renovations and cover some of the associated care costs, using the equity in their home as a resource.
- Creating an Emergency Fund: David, 65, has a good retirement income but wants a safety net for unexpected expenses. He sets up a reverse mortgage line of credit, which he doesn’t touch unless he needs it, providing peace of mind.
Who Does a Reverse Mortgage Affect?
- Homeowners aged 62 and older: This is the primary demographic.
- Heirs: When the borrower passes away or permanently moves out, the heirs have several options: sell the home to repay the loan, pay off the loan balance (up to 95% of the home’s appraised value) and keep the home, or walk away if the loan balance exceeds the home’s value.
- Lenders and servicers: They manage the loan and ensure compliance with HECM regulations.
Tips and Strategies
- Get counseling: All potential HECM borrowers must receive counseling from an independent, government-approved agency. This ensures you understand the loan’s terms, costs, and implications.
- Shop around: Compare offers from different lenders, as fees and rates can vary.
- Understand the costs: Reverse mortgages come with upfront costs (origination fees, mortgage insurance premiums, appraisal fees, title insurance, etc.) and ongoing costs (servicing fees, ongoing mortgage insurance).
- Consider your heirs: Discuss your plans with your heirs so they understand how the reverse mortgage works and what their options will be.
- Maintain your home: Keep up with property taxes, homeowners insurance, and home maintenance to avoid loan default.
Common Misconceptions
- “I lose ownership of my home.” You retain ownership of your home as long as you live in it and meet the loan obligations.
- “My children will have to pay the loan back.” Your heirs are not personally responsible for any debt exceeding the home’s value. They can choose to repay the loan or let the lender take the home.
- “It’s a scam.” Reputable reverse mortgages, especially HECMs, are regulated and insured by the federal government. However, it’s crucial to work with a trusted lender and complete the required counseling.