When you own a home and need additional cash flow, a reverse mortgage is one way to get it. A reverse mortgage allows you to tap into your home equity, which is the money your home is worth, without having to sell your home. It is called a reverse mortgage because rather than you sending a check to the bank each month, the bank sends a check to you every month. Alternately, some reverse mortgages are set up so the bank gives you a lump sum when you first get the mortgage, or you have a line of credit that you can draw from as you need money. You can use the money for any purpose, including supplementing retirement income, making home improvements, or paying for health care expenses.
Before you consider getting a reverse mortgage, it is important to understand exactly how it works. The basic idea is that a bank lends you part of your home equity for as long as you are living in the home. The money lent to you accrues interest each month, but you do not need to make any payments back to the bank until you sell your home, stop using it as your primary residence, or die. At that point, the reverse mortgage is due in full. Most borrowers end up using the proceeds from selling the home to pay back the reverse mortgage.
Eligibility requirements to get a reverse mortgage
- Be age 62 or older to be eligible for a reverse mortgage. If you own the home jointly, only one of you needs to be 62 or older.
- Own your home free and clear without a mortgage, or have only a small mortgage remaining. If you have a small mortgage, the bank will set up the reverse mortgage so it pays off your existing mortgage before you can receive any money.
- Be current on your property tax and homeowner's insurance payments when you get a reverse mortgage. You also need to keep up with these payments while you have a reverse mortgage.
- Live in the home as your primary residence.
- Maintain your home in reasonable condition. The bank will inspect the home prior to offering the mortgage and may require that you make specific repairs. Also, you must keep up with maintenance and repairs while you have the reverse mortgage.
Advantages of reverse mortgages
When you are living on a fixed income during retirement, a reverse mortgage has a few facets that make it very appealing. If these advantages fit with your desires, you may be a good candidate for a reverse mortgage.
- Tap into your home equity without having to sell your home, which allows you to access some of the wealth you have built during your working years.
- No need to make payments to the bank while you are living in your home, which you would need to do if you got a traditional home equity loan.
- Flexible terms on how much money you can obtain, which allows you to set up the reverse mortgage in the way that works best for your needs.
Disadvantages of reverse mortgages
Before you jump into getting a reverse mortgage, you need understand the disadvantages of this financial decision. It can have serious repercussions, not only for you but also for your family and heirs.
- The money you borrow from the bank in a reverse mortgage accrues interest at a variable interest rate. That rate is often much higher than the interest rate on a traditional mortgage or home equity loan.
- You must repay the reverse mortgage in full when you sell your home. You must also repay the mortgage if you stop using it as your permanent residence, stop making tax and insurance payments on time, let your home fall into disrepair or die. That repayment must include the accrued interest. If you were planning to leave your home to your heirs, you must understand that they will need to repay the reverse mortgage out of pocket or sell your home to repay the reverse mortgage.
- The closing costs on a reverse mortgage often add up to between $5,000 and $10,000, which makes it a very expensive loan if you do not end up keeping it very long. You can choose to pay closing costs in cash or make them part of your loan, in which case they accrue interest just as the other money you borrow does.
- A reverse mortgage is considered as income when determining your eligibility for some income-based benefits, including Medicaid and SSI. This may disqualify you from receiving these benefits.