If you’re a senior, or close to it, you might be considering how you’ll fund your Golden Years. Are your savings and investments strong? Do you feel comfortable with your monthly income? If the answer to any of these questions is no, a reverse mortgage in retirement might be a good option for you.
For seniors who own their home outright or owe very little, a reverse mortgage can give your budget some much-needed wiggle room. Let’s explore how they work and whether you should apply for a reverse mortgage.
What is a reverse mortgage?
Simply put, a reverse mortgage is an opportunity to turn some of your home equity into cash via a loan.
When you take out a reverse mortgage, your home is your collateral. The amount of money you can borrow varies. Typically, it’s no more than 80% of the equity you currently have in the home, based on its appraised value.
With a traditional mortgage, you have to make monthly payments. With a reverse mortgage, there are no monthly payments. Instead, the lender makes payments to you.
The full amount of a reverse mortgage comes due all at once, when you’re no longer living in the house.
Who qualifies for a reverse mortgage?
Unlike most other loans, reverse mortgages aren’t dependent on credit scores or credit history. There are, however, other requirements you’ll have to meet.
To be considered for a reverse mortgage, you must:
- Be 62 years of age or older
- Be on the title of the home
- Use the home as your primary residence
- Own the home outright or have substantial equity (typically at least 50% of the home’s value)
There are also requirements for your home.
- Single family homes are the most common and generally approved.
- Multi-family homes may be eligible, as long as there are no more than 4 units (quadruplex) and one of the units is your main residence.
- The majority of condominiums are eligible, as long as they are approved by the FHA.
- Manufactured homes (also known as mobile homes) may be eligible, as long as they are built after June 15, 1976 and HUD-approved.
- Farms may qualify, depending on their acreage and the value of the home.
If you’re unsure whether your home will qualify for a reverse mortgage, talk to a reputable lender for clarification.
Pros of a Reverse Mortgage
Can a reverse mortgage in retirement work for you? Let’s look at some of its biggest advantages.
No Monthly Payments
With a reverse mortgage, you don’t have to worry about adding a monthly payment into your budget. This is one of the biggest advantages of a reverse mortgage over other types of loans.
However, you should keep in mind reverse mortgages do accrue interest. With a traditional mortgage, the amount you owe decreases each month as you make payments. But with a reverse mortgage, the amount you owe will actually increase each month, as interest accumulates.
Because of this, it’s possible at the end of the loan you’ll owe more than your home is worth. So making monthly interest payments, while not required, can help you avoid a tricky financial situation at the end of the loan.
It’s a Non-Recourse Loan
Another important benefit of a reverse mortgage in retirement is that it’s what’s known as a non-recourse loan. This means neither you nor your estate (your heirs) are responsible for more than the value of your home. If the home sells for less than what you owe, the lender can’t sue you for the difference.
You Can Use the Money As Needed
A reverse mortgage is usually disbursed in one of three ways: a flat payment, monthly payments, or a line of credit. And in all of those cases, the money is yours to use as needed.
- Pay off credit card or other high-interest debts
- Take care of unexpected medical bills
- Make necessary home repairs or improvements
- Delay social security benefits to access higher benefits later
- Pay for in-home care
Cons of a Reverse Mortgage
Of course, not everything is a benefit when it comes to taking out a reverse mortgage in retirement. There are some drawbacks to consider, too.
You Won’t Necessarily Get All of the Money
The reverse mortgage must be your primary loan. If you owe money on your first (traditional) mortgage, you’ll have to use funds from the reverse mortgage to pay it off. Then you’ll have access to the remaining amount.
Depending on how much you still owe, this could eat up a significant chunk of your funds.
You’ll Have to Meet Obligations
Your reverse mortgage lender will have obligations you’ll be required to meet while you have your reverse mortgage.
- You’ll have to keep the home in good condition, make necessary repairs, and take care of routine maintenance.
- You’ll still be responsible for any other bills associated with your home. This will include homeowners’ insurance, property taxes, HOA fees, and any others.
Your home is the lender’s collateral, so they’ll want to make sure it’s taken care of!
Another drawback to a reverse mortgage in retirement is the potentially high closing fees.
- Mortgage Insurance Premiums: 2% of the home’s appraised value, paid upfront, plus an annual 0.5% of the outstanding balance.
- Origination Fee: 2% of the first $200,000 in value and 1% for anything above that amount. Maximum: $6,000.
- Additional Costs: roughly 1% of the home’s appraised value. This includes the appraisal, title search, and other third-party services.
You might be able to roll some of these fees into your loan, making it more affordable to close on your reverse mortgage.
Your Heirs Probably Won’t Get to Keep Your Home
For many homeowners, this is the biggest drawback of a reverse mortgage in retirement. Chances are, your heirs won’t be able to keep your home.
When you pass away, your loan will be due immediately. Unless your heirs have the fund available or can quickly refinance your home, chances are they will have to sell the home. Since real estate is usually the biggest inheritance left, you might be leaving your family with nothing.
Is a reverse mortgage in retirement a good idea?
If you need financial security when you are planning and saving for retirement and don’t have family members interested in inheriting your home, a reverse mortgage might be a good option. Make sure you compare lenders for the best rates and terms before making any decisions.
But if you’ve been planning on leaving your home to your heirs, a reverse mortgage probably isn’t your best choice. Consider meeting with a financial planner to discuss refinancing, downsizing, or other options.
There’s never a one-size-fits-all solution to financial questions. Taking out a reverse mortgage is a big decision that will impact you and your estate. Think it through carefully, do your research, and meet with estate attorneys, financial planners, and anyone else who can help you make the best financial decision.
Biography: Anna Compagine Cohen is a Content Writer at UpNest, where agents compete and you win. Anna has an extensive background in the real estate industry. She is a published author who specializes in real estate, personal finance, travel, and wellness. When she’s not writing, Anna can be found reading, walking on the beach, or spoiling her teenagers and their rescue dogs.