As a Senior Real Estate Specialist (SRES), I work with many clients whose primary objective is to age in place and remain in their family home. Some individuals face a variety of challenges, including health and mobility, but for many it’s strictly financial. For those who are healthy and physically able to take care of their home, but are struggling financially, a reverse mortgage may be a good solution.
Reverse mortgages offer many homeowners a way to stay in their own homes by borrowing against the equity they have created through years of making those monthly payments. In this article, I will share some good reasons to consider a reverse mortgage, some reasons why it’s not such a good idea, and some tasks to complete prior to moving forward.
Why Should You Consider a Reverse Mortgage?
A reverse mortgage helps homeowners in need in two keyways:
The loan eliminates your existing mortgage (if you still have one), which means that you will no longer have to make regular mortgage payments. This alone can dramatically improve your monthly budget.
In most cases, the loans will also give you access to cash or a line of credit, which can be used in any way you want. You can use the money to make ends meet, enhance your monthly spending, or splurge on something you have always wanted. Many people use the funds to help with medical costs, remodel, cover larger one-time expenses like a new roof, or help a loved one buy their own home.
Housing Prices Are High — When your home is valued higher, your reverse mortgage loan amount is higher. So, if your home value falls, then the amount you qualify for also falls. And, in some cases, you may not qualify at all.
Interest Rates Are Low — When interest rates are low, you can get access to more money from a reverse mortgage. (Conversely, if rates start rising, then you may qualify for less - if you still qualify at all). Interest rates are at record lows right now.
You Are Older — The older you are, the more you can qualify for with a reverse mortgage.
You Want to Stay in Your Home for the Rest of Your Life — Most of us want to stay in our own homes for as long as possible, and a reverse mortgage can help make that happen. While downsizing may be a financially efficient way of eliminating your mortgage and accessing home equity, you may not get a place that you love in the same way you do your current home.
You Want the Loan to Improve Your Quality of Life — For most homeowners, your home is your most valuable asset. And, you have worked hard to pay down or pay off your mortgage, so there is no reason why you should not benefit from your own diligence. Many reverse mortgage borrowers get these loans so that they can live a more fulfilling life in retirement; again, there are no restrictions on how the money is spent.
You Are Getting the Loan as a Back Up Plan — More and more homeowners are securing a reverse mortgage as a backup plan since a reverse mortgage line of credit can be an excellent way to increase flexibility in your finances. If you don’t necessarily need access to money but want a rainy-day fund or an extra financial option, then a reverse mortgage could be an appropriate solution.
A reverse mortgage with a line of credit can be one of the MOST affordable ways to secure a reverse mortgage because:
You won’t accrue interest on the money being held in the account, but it is there for you if you need it. You will only accrue interest on money you withdraw from the line of credit.
The lines of credit can grow every year after you establish them, which gives you more borrowing power as you age.
You Own Your Home Free and Clear — If you have already paid off your mortgage and do not owe anything else on your home, then you really should consider getting a reverse mortgage line of credit as a backup plan. Again, you won’t accrue any interest on the line of credit unless you withdraw from it.
A reverse mortgage in general simply gives you more choices for maximizing your wealth. If you need funds, then you can withdraw from savings, investments, or your reverse mortgage, and decide about which source of money will cost you the least in the long run.
Reasons to Give Pause
You Are Concerned About How Much You Can Leave to Heirs — When you get a reverse mortgage, you retain ownership of the home, which means it is still your asset and it can be left to your heirs. However, your heirs will be responsible for paying back the reverse mortgage balance. Most heirs do this by selling the home; moreover, they will never owe more than the value of the home at that time, and many times there is still equity left for the heirs.
You Can’t Afford Upkeep — When you secure a reverse mortgage, any mortgage payments you might have been making go away, but you must still be able to pay for taxes, insurance, and maintenance of your home. If you cannot afford to pay these items for the foreseeable future, then the loan might not be a good idea. When you start talking with a lender about getting a reverse mortgage, they will set up a mandatory financial counseling session that with help you assess whether or not you can afford your home for the long-term.
You Want to Move Elsewhere in the Near Future — Reverse mortgages are not a great loan if you intend to move in the relatively near future. The costs of the loan are best spread out over, at least, a five-year period.
If Your Spouse is Younger than 62 − To qualify for a reverse mortgage, the primary borrower must be at least 62 years old. While technically your spouse can be younger, it is best to wait until each partner is eligible.
Your Home Won’t Accommodate Aging in Place — You probably love your home now, but if you are considering a reverse mortgage, you’ll want to think about how the home will function for you when you are older. For example, does your home have a lot of stairs? Do you have a plan for navigating the stairs if you develop problems with walking? Can you afford to make modifications to the home that will make it comfortable for you?
My Personal Experience
My mother took out a reverse mortgage in the form of a credit line, which enabled her to take out a small amount monthly to augment her monthly budget. This was particularly helpful when larger amounts were needed, such as that long overdue bathroom renovation. In my mother’s case, the reverse mortgage removed her worry of paying the bills each month and it greatly improved her quality of life. When she passed, my siblings and I had time to grieve, sort through her belongings, and prepare the home for sale. When the sale was complete, the bank was paid and a nice inheritance remained. For my mother and our family, it was a good decision.
Pursuing a reverse mortgage is an important and extremely personal decision that should be considered seriously as it is not for everyone. For many, the thought of using home equity is very disconcerting, but please remember, this is your retirement and your life. What’s more important in retirement: equity or cash?
Please note that this article is by no means intended to give specific financial, legal, or tax advice. That should be done in personal meetings with trusted and licensed financial professionals.