What is a Reverse Mortgage?

A reverse mortgage is a type of loan that allows homeowners 55 and over to convert part of the equity in their home into cash. It’s typically used to provide additional monthly income or access to capital in retirement. Here’s a breakdown of why people choose to get a reverse mortgage, its benefits, who qualifies, and some pitfalls.

Why People Choose a Reverse Mortgage

1. Supplementing Retirement Income: Many people choose reverse mortgages to increase their income during retirement, especially if they lack sufficient savings or a pension.

2. Staying in the Home: Unlike other types of loans that might require regular repayments, reverse mortgages allow the homeowner to remain in their home without making monthly payments.

3. Reducing Monthly Expenses: With no mandatory monthly mortgage payment, homeowners can reduce their monthly expenses, potentially freeing up cash for other needs.

4. Consolidating Debt: Some use a reverse mortgage to pay off an existing mortgage or other debts, which can improve cash flow.

Benefits of a Reverse Mortgage

1. No Monthly Payments Required: Unlike traditional mortgages, there are no required monthly payments; repayment occurs only when the homeowner sells the house, moves out permanently, or passes away.

2. Access to Tax-Free Cash: The funds received from a reverse mortgage are generally tax-free, providing a way to access cash without additional tax burdens.  Borrowers should always seek the advice of a licensed tax specialist for specific tax advice and guidance.

3. Retaining Home Ownership: Homeowners retain ownership of their homes and can stay there as long as they follow the terms of the loan (occupying the property no less than six months per year, paying property taxes, maintaining insurance, and keeping the home in good repair).

4. Flexible Payout Options: Borrowers can receive funds in various forms, such as a lump sum, a line of credit, monthly payments, or some combination of these options allowing them to tailor the payout to their needs.

5. Non-Recourse Loan Protection: The loan is non-recourse, meaning the homeowner or their heirs won’t owe more than the home's value when it's time to repay, even if the loan balance exceeds that value.

Who Can Get a Reverse Mortgage?

1. Age Requirement: Generally, reverse mortgages are available to homeowners aged 55 and older.  

2. Home Ownership: The borrower must own the home, and it must be their primary residence.

3. Sufficient Home Equity: Homeowners need to have significant equity in their homes, as this will determine the loan amount.

4. Financial and Credit Requirements: Borrowers must demonstrate the ability to pay property taxes, homeowners’ insurance, and other home-related expenses.

Potential Drawbacks to Consider

While reverse mortgages can offer financial flexibility, they can also come with higher upfront fees and interest costs than traditional mortgages. Over time, interest on the loan accumulates, potentially reducing the amount of equity left for heirs. Additionally, the homeowner must have the ability to pay property taxes, insurance costs and for ongoing maintenance for the home, although under some circumstances, these amounts can be provisioned for and included in the proceeds of the reverse mortgage.

If you or someone you love would like to explore the specific impacts of a reverse mortgage, please reach out to us for a personalized and confidential consultation.