Exploring ways to tap into your home’s equity can feel a lot like sorting through a bag of Halloween candy—some options seem like sweet treats, while others may feel like tricks to avoid. And like many financial tools, reverse mortgages, are often surrounded by myths and misunderstandings that can make them seem more complicated than they really are.
Unfortunately, these misconceptions can cause people to overlook this valuable financial tool, preventing them from experiencing the stability and peace of mind a reverse mortgage could bring to their golden years.
At its core, a reverse mortgage is designed for homeowners aged 62 and older, allowing you to convert a portion of your home’s equity into cash without having to sell the home. Of course, as with any mortgage, meeting all loan obligations, including keeping up with property taxes, insurance, and maintenance, is required.
Let’s take a closer look at some of the most common misunderstandings about reverse mortgages and separate fact from fiction. By understanding how a reverse mortgage really works, you can make a confident, informed decision about whether tapping into your home equity is the right move for your retirement plan.
We’re here to help you spot the tricks—and appreciate the treats—of reverse mortgages.
Trick #1: The bank takes ownership of your home.
Treat: You retain full ownership and title to your home.¹ Like a traditional mortgage, you keep the title to your home and remain the owner.¹ The lender simply places a lien on the property to secure the loan, like a traditional mortgage, which ensures repayment when a maturity event occurs—such as when you permanently move out of or sell the home.
Trick #2: You’ll have to take on monthly payments.
Treat: Monthly mortgage payments are optional.¹ One of the most significant benefits of a reverse mortgage is that it eliminates the need for monthly mortgage payments.¹ This can free up significant cash flow each month. And if you have an existing mortgage, the reverse mortgage proceeds are first used to pay it off, removing that monthly obligation. The relief from the burden of a monthly mortgage payment can make a real difference in your budget and financial flexibility.
Trick #3: Your children will be stuck with your debt.
Treat: Your heirs will never owe more than the home’s value at the time of its sale. Reverse mortgages are “non-recourse” loans. This crucial feature means that if the loan balance grows to be more than the home’s market value when it’s time to repay, neither you nor your heirs will be responsible for the difference if you choose to sell the home. The home itself is the sole asset used to settle the loan. Your heirs can choose to pay off the loan and keep the home, sell it to repay the balance and keep any remaining equity, or simply deed it to the lender to satisfy the debt.
And, although many people who take out reverse mortgages have leftover funds for their children, you may choose to explore a reverse mortgage option that explicitly sets aside equity for your heirs. For instance, Longbridge’s Platinum Preserve®2 proprietary reverse mortgage option allows you to preserve a portion of your home’s equity for the future—providing an extra layer of protection and peace of mind.
Trick #4: You can’t get a reverse mortgage if you still have a mortgage.
Treat: You can qualify even with an existing mortgage balance. As long as you have sufficient equity in your home (usually around 50% of your home’s value), you can still qualify. In fact, many retirees use a reverse mortgage to pay off their existing mortgage. The funds are used first to settle the remaining balance—which then eliminates that required monthly payment1—and all of the remaining proceeds are yours to use as you wish.
Trick #5: The funds you receive are heavily restricted.
Treat: You have the flexibility to receive and use your funds in multiple ways. A reverse mortgage offers remarkable flexibility. You can choose how to access your home’s equity in a way that best fits your financial goals (or combine these options3 to create a personalized plan):
- Lump Sum: Receive all your available funds at once in a single payout. This is a fixed-rate option often used for large, immediate expenses like consolidating debt or making a significant purchase, such as funding a home modification project.
- Monthly Payments: Establish a steady stream of cash either for a set term or for as long as you live in the home—supplementing your income on a regular schedule you can count on.
- Line of Credit3: This option lets you draw funds as you need them, and the unused portion of the credit line grows over time,4 giving you access to more funds in the future.
And, once you receive your funds, you can choose to use them however you wish—ranging from practical home upgrades and boosting your everyday spending power, to funding your dream vacations and checking items off your bucket list.
Trick #6: The money you get will be taxed as income.
Treat: Reverse mortgage proceeds are generally not considered taxable income.5 The IRS classifies the funds you receive from a reverse mortgage as loan proceeds, not income, so the funds you receive are typically income tax-free.5 In fact, many retirees strategically leverage their home equity to supplement their income without having to make taxable withdrawals from accounts like a 401(k) or IRA. Still, it’s always wise to consult a financial advisor or tax professional to understand how this may apply to your specific situation.
Trick #7: Reverse mortgages are just a last-resort option.
Treat: A reverse mortgage can be a strategic tool for proactive retirement planning. Today, many financial professionals recommend using a reverse mortgage proactively—and for a diverse set of financial goals. For example, by establishing a line of credit early in retirement, you can create a financial safety net that grows over time.4 This can be used to protect your investment portfolio during market downturns, delay taking Social Security benefits to maximize your monthly payouts,5 or establish a “rainy day fund” for unexpected expenses without liquidating other assets.
Treat Yourself to Greater Financial Flexibility
Navigating your financial options in retirement requires clarity and confidence. By looking beyond the “tricks” and understanding the “treats,” you can discover how a reverse mortgage could transform your financial future. It offers a powerful way to unlock the power of your home’s equity—providing the stability, flexibility, and peace of mind you deserve in your golden years.
Of course, choosing a reputable lender you can trust is a key part of accessing all of the benefits a home equity loan has to offer. At Longbridge Financial, we’re committed to helping you understand all your options so you can make the best choice for your unique situation.
If you’d like to learn more about incorporating a reverse mortgage into your financial plan, contact our team today!