As the saying goes, “Home is where the heart is.” But did you know it’s also where a significant portion of wealth lies? With home equity often representing a substantial chunk of older homeowners’ total wealth, it’s no wonder many eye it as a potential source to bolster their retirement funds. Yet, despite the allure, many are reluctant to tap into that wealth.
While some seniors entertain the idea of accessing their home equity 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
- You Can Continue Living In and Owning Your 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 (you must meet your loan obligations, like keeping up with property taxes, homeowners insurance, and home maintenance). Although some people looking to access cash in retirement opt to sell their home, 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.
In fact, it’s common for borrowers to use the proceeds from a reverse mortgage to make home modifications and improvements to accommodate their evolving needs as they age. These can include kitchen renovations, bedroom upgrades, and bathroom enhancements. By leveraging the equity in your home with a reverse mortgage, you can maintain your independence and remain safely and comfortably in the place you cherish for years to come.1 - You Don’t Have to Make 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!1 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 be used to pay it off,2 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. - You Can Supplement Your Income for Retirement Expenses
Retirement gives you more time for the things you love, but these often come at a cost—which can be particularly difficult to manage for those on a reduced or fixed income. Fortunately, home equity can provide an additional source of income-tax free3 funds to draw from.
In fact, you can use your home equity however you wish. While some people opt to direct their funds towards everyday expenses, home modifications and healthcare costs, others choose to fund more personal goals such as taking a bucket-list trip, helping loved ones, or enjoying hobbies they love—the possibilities are endless. - You Can Boost Your Financial Flexibility
Reverse mortgages are flexible in more ways than one. In addition to freedom in how you choose to use the funds, you also have several choices for how you receive your funds. Whether through a lump sum, a steady monthly payment, a line of credit,4 or a combination of these methods,5 you can set up the distribution in the way that best fits your goals.
With a lump sum, you get a fixed amount right away—perfect for big, immediate expenses like consolidating debts orbuying 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 reverse mortgage 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. And, your available credit can grow more quickly if interest rates rise,4 ultimately resulting in greater funds available to you down the line. Of course, you can also mix and match these three options to achieve the perfect distribution for your needs. - You Can 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-taxable3—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. - Your (or Your Heirs) Will Never Owe More Than the Home’s Value at the Time of its Sale
With a reverse mortgage, neither you or your heirs will ever owe more than the home is worth at the time the home is sold and the loan is repaid—even if the home depreciates in value to the point that the balance owed exceeds the value of the home. Additionally, the lender cannot pursue any assets other than the home to repay the loan and cover maintenance costs. This “non-recourse” feature gives borrowers and their loved ones greater peace of mind.
CONS
- Not Everyone Can Qualify
As we’ve covered so far, reverse mortgage could be a powerful financial tool – but not everyone can qualify for the loan. A major 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 556 for some proprietary reverse mortgage programs, like Platinum by Longbridge. 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.
Additionally, you can’t be behind on any federal debt to qualify for a reverse mortgage. These requirements, and others, are meant to ensure that, as a borrower, you can handle the financial obligations and occupancy requirements of the loan. - There are Fees Involved
Before you proceed with a reverse mortgage loan, it’s important to understand the associated costs, which can include a loan origination fee, counseling fee, appraisal fee, and closing costs. The good news is, many of these costs can be waived, negotiated, or covered by the loan proceeds, reducing your upfront expenses. Costs can vary by location and lender, so it’s a good idea to make sure you’re getting the best offer from your lender.
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, might be a good alternative. These don’t require government insurance and therefore lessen upfront costs—though they may have higher interest rates. - Home-Related Expenses Can Add Up
With a reverse mortgage, even though you aren’t required to make monthly mortgage payments, you’re still responsible for meeting loan obligations, which include 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 understand its implications for 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—and helping them unlock the Power of Home®️ to create a more comfortable, secure retirement. 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!