Chances are high that when I mention the idea of a reverse mortgage to clients, I’ll be met with a very sour expression. I think this is because of the impression that these instruments are expensive and that you give up ownership of your home to use them.
Now I am no expert in these products, but for clients who have most of their net worth tied up in their homes, finding a way to use that equity to pay bills is a must.
Reverse Mortgage Basics
Here are some reverse mortgage basics:
- Reverse mortgages are also known as home equity conversion mortgages (HECM) and are administered by the FHA.
- You enter an arrangement with the lender to take money out of your home based on the amount of equity you have and your age.
- You don’t have to have earned income to qualify.
- You keep the ownership of your house until the last occupant dies or moves out.
- You can receive the income from home equity in a variety of ways: For a specific time period, as a credit line to use as needed, or for your lifetime or the time that you or your spouse occupy the home.
- When you pass away or move from the home, whatever equity is left after the debt and fees are paid will pass back to you (if living) or to your estate. (For related reading, see: How Does a Reverse Mortgage Work?)
An HECM is different than a home equity loan or line of credit. With a traditional home equity loan, you have to pay back the principal and interest over time. With a reverse mortgage, your house actually pays you.
Benefits of a Reverse Mortgage
Brainiacs who are way smarter than me have been modeling the use of a reverse mortgage in retirement planning. The numbers show that using home equity for income, especially when retirement investments are down, can lengthen the time your nest egg will last. Wade Pfau has been doing research on the use of reverse mortgages in retirement income plans and says there are two big benefits:
- Using a reverse mortgage early in retirement can reduce the stress of market volatility on the invested portfolio by allowing people to live off of their home equity rather than selling investments when values in their accounts are down.
- The second benefit is that opening a reverse mortgage now (especially with current low interest rates) can allow for the principal that you can borrow against to grow for a longer time.
Not everyone can get a reverse mortgage. You must be at least 62 years old, live in a single-family or two-to-four-unit home, and there is a limit to how much mortgage debt can be against the home at the time you apply for the HECM. (For related reading, see: The Reverse Mortgage: A Retirement Tool.)
This is not for everyone. Some downsides are:
- The closing costs and fees on reverse mortgages are more expensive than conventional loans.
- You may be tempted to spend your home equity on dumb stuff instead of using it prudently.
- You still must have enough income or savings to maintain the home and pay property taxes and insurance.
- There are people out there selling reverse mortgages who may not have your best interest at heart. Investigate and get several quotes before deciding on who to use for a reverse mortgage. (For related reading, see: Beware of These Reverse Mortgage Scams.)
If you are feeling your retirement income is too tight and you meet the eligibility requirements, using your home equity through a home equity conversion mortgage may be worth investigating.
Check out more from Wade Pfau in this Forbes article. For more information, you can also call National Council on Aging at (800) 510-0301.