“Home is where the heart is,” they say. But did you know it’s also where a significant portion of wealth lies? With home equity often representing a substantial chunk of total wealth, it’s no wonder retirees eye it as a potential source to bolster their retirement funds. Yet, despite the allure, there’s a divide in the air. While some seniors entertain the idea of tapping into this wealth through a Home Equity Conversion Mortgage (HECM), better known as a reverse mortgage, others remain wary. Years of misconception and a somewhat tarnished reputation have left many on the fence about exploring this financial avenue.
But regardless of where you stand, getting the full picture is crucial. Just like any financial product, understanding all the details is key to making an informed decision about whether a reverse mortgage could be a valuable component of your retirement plan. To start, let’s explore the pros, cons, and basics of reverse mortgages.
PROS
- Continue Living at Home1
There’s no place like home! And contrary to common misconceptions, a reverse mortgage allows you to continue living in your home – while retaining full title and ownership (borrowers must meet their loan obligations, keeping current with property taxes, insurance, and maintenance). Some people opt to sell their home to access cash, however, a reverse mortgage provides a welcome alternative – providing a source of cash flow, stability, and familiarity as you continue to age in the comfort of your home.
And speaking of aging in place, many retirees use cash from a reverse mortgage to make home modifications and improvements to accommodate their evolving needs as they age. By leveraging the equity in your home, you can maintain your independence and remain safely and comfortably in the place you cherish for years to come. - Supplement Your Income for Retirement Expenses
Retirement gives you more time for the things you love, but these often come with extra costs. And managing these costs on a reduced or fixed income can prove challenging. Fortunately, home equity can provide an additional source of funds.
Using a reverse mortgage with a line of credit2 can provide steady cash flow and let you use your home equity as you wish. You will always have access to these funds as long as you meet your loan obligations and have funds remaining. This is a major benefit compared to traditional Home Equity Lines of Credit (HELOC), which banks can freeze or cancel without warning. - Lower Your Taxable Income
In addition to its flexibility, a reverse mortgage can offer significant tax-related benefits.3 The IRS categorizes funds from a reverse mortgage as “loan proceeds,” which means they are not income-taxable—unlike withdrawals from retirement accounts like 401(k)s or IRAs. Many retirees choose to use reverse mortgage proceeds to avoid making taxable withdrawals from these accounts, which keeps their taxable income lower and allows their retirement savings more time to grow.
It’s important to consult with a financial advisor to ensure this strategy aligns with your overall financial situation, as tax regulations and personal circumstances can differ greatly. - Flexibility
What’s another one of the biggest “pros” of a reverse mortgage? In a word – flexibility. You have several choices for how you receive your funds, so you can make your home’s equity work for you in the way that fits your life best. Whether you want a lump sum, a steady monthly payment, or a line of credit2 for unexpected expenses, there’s an option to suit your needs.
With a lump sum, you get a fixed amount right away – perfect for big, immediate expenses like consolidating debts or buying a new home. Monthly payouts provide a reliable stream of cash flow, and you can choose from fixed-term or lifetime payments depending on your retirement plans. A line of credit, meanwhile, gives you the freedom to withdraw funds as needed, which is great for keeping on top of whatever life throws your way. Additionally, you can mix and match these three options, giving you even greater flexibility. - No monthly mortgage payments1
Perhaps the biggest perk of a reverse mortgage is that monthly mortgage payments are optional.1 That’s right—no mandatory monthly payments as long as you stay current with property taxes, insurance, and home maintenance. This can significantly boost your cash flow by eliminating a major monthly expense. And if you currently have a mortgage balance, a reverse mortgage will first pay it off, freeing up even more cash. Any remaining funds are yours to use however you choose!
And while no monthly mortgage payments are required,1 you still have the freedom to pay as little or as much as you want, as often as you’d like. No repayment is required until a maturity event occurs, such as when you either permanently vacate the home or fail to meet the loan terms mentioned above. - Non-recourse loan
With a HECM reverse mortgage, you (or your heirs) won’t owe the lender more than your home’s value at the time of repayment when the home is sold. This safeguard, known as non-recourse protection, ensures that if your loan balance exceeds your home’s value at the time of its sale, you won’t be responsible to cover the difference. Additionally, the lender cannot pursue any assets other than the home to repay the loan and cover maintenance costs.
CONS
- Not everyone can qualify
As the aforementioned “pros” suggest, a reverse mortgage could be a powerful financial tool – but not everyone can qualify for the loan. Perhaps the most obvious criteria to qualify for a reverse mortgage is having sufficient home equity – as a general “rule of thumb,” this is typically at least 50% of your home’s value. Other basic qualifications include meeting the minimum age requirement, which is 62 for FHA’s Home Equity Conversion Mortgage (HECM) and 554 for most jumbo proprietary reverse mortgage programs, like Longbridge Platinum. In addition, your home must be your primary residence and meet specific property qualifications—vacation homes, secondary homes, and homes on income-producing land, like farms, do not qualify.
Like any mortgage, you must meet loan obligations, like keeping up with property taxes, insurance, maintenance, and any HOA fees. Additionally, you can’t be behind on any federal debt to qualify for a reverse mortgage. These requirements are meant to ensure that, as a borrower, you can handle the financial obligations and occupancy requirements of the loan. - There are fees involved
Nothing in life is free, and that includes reverse mortgages. It’s important to understand the associated costs, which can include a loan origination fee, counseling fee, appraisal fee, and closing costs. While these fees can add up, some can be waived, negotiated, or covered by the loan proceeds, reducing your upfront expenses. Costs can vary by location and lender, so it’s wise to shop around.
Another cost to consider is the mortgage insurance premium (MIP). This is a 2% initial premium of the property value due at closing and an ongoing annual premium of 0.5% of the outstanding mortgage balance. If you own a high-value property, a proprietary or jumbo reverse mortgage like Longbridge Platinum, might be an alternative option. These don’t require government insurance, avoiding large upfront costs, though they may have higher interest rates. - You will still incur home-related expenses
With a reverse mortgage, you’ll still be responsible for ongoing home maintenance costs, property taxes, and homeowners insurance since you continue to own the home. Staying current with these payments is vital to your reverse mortgage agreement, as failing to do so can trigger the loan to become due and payable. A Life Expectancy Set Aside (LESA) can help manage these expenses, similar to an escrow account in traditional mortgages. A LESA provides peace of mind by ensuring that taxes and insurance are taken care of automatically.
And there you have it – a comprehensive look at the ins, outs, and in-betweens of reverse mortgages. While this financial tool holds the potential to transform your retirement, it’s crucial to weigh its implications against your unique situation and goals. After all, financial decisions carry significant weight. But before you choose to take the plunge into a reverse mortgage, there’s another crucial decision to make: choosing the right lender.
At Longbridge Financial, we’re committed to responsibly helping homeowners reshape their financial future by educating them on reverse mortgages – and helping them unlock the power of their homes. And we can help you, too!
Together, we’ll delve into your aspirations, your property, and your financial landscape as we help you navigate through your options. Our commitment to your satisfaction is unwavering, and we’ve even formalized it into a set of written commitments.
If you’re contemplating tapping into your home’s equity or simply want to learn more – including discovering how much you may qualify for with a reverse mortgage – contact the Longbridge team today!
