Reverse mortgages allow borrowers to convert the equity in their home into cash that is usually tax free* without the need for monthly mortgage payments. In a reverse mortgage, the loan is taken out against a senior’s home equity and repaid in one lump sum when the borrower leaves the home. The loan does require that borrowers continue to make payments on property taxes, insurance, and maintenance (ex: HOA fees, if applicable) but can help seniors gain financial independence from an increase in living expenses.
Some of the key advantages to a reverse mortgage include:
The ability to receive money from your home equity that is usually tax-free.*
Payments are made to you from your accumulated property equity, which may enhance and extend your retirement. You have options on how to receive this money: lump sum, line of credit, or monthly payments. Please note that a line of credit may allow you to pay down the line if you want to have less cash and an increase in equity.
The opportunity to delay Social Security payments and increase monthly income.*
Reverse mortgages can allow you to delay taking money out of your IRA and avoid penalties and/or taxes because the proceeds do not count toward your income. If you haven’t drawn from your Social Security account yet, you should consider discussing this option with a tax advisor or financial planner.
The assurance that you never owe more than the home is worth.⁺
When you move out of the home (whether by selling or death), neither your estate or its heirs are responsible to pay a deficit on the balance owed if your mortgage exceeds the value of your home. If your heirs choose to keep the home, they can purchase it for 95% of the currently appraised value.
The chance to bridge the Medicare gap from 62 to 65.
Some borrowers feel the need to delay retirement until age 65 because they cannot afford their own health insurance before Medicare kicks in. But a reverse mortgage can help you avoid paying income tax on money drawn from your IRA or other accounts to help you keep your retirement plan in place without diminishing your current assets.*
The opportunity to eliminate monthly mortgage payments.
Reverse mortgages remove the requirement that you pay monthly payments during your lifetime as long as you live in your home, pay taxes and insurance, and maintain the home by paying HOA fees, if applicable.
The ability to pay for long-term care expenses.
A reverse mortgage may provide proceeds which can be used to purchase expensive but necessary long-term care insurance without losing your home in the process.
To be eligible for a reverse mortgage, borrowers must:
- Be 62 years or older
- Own their home and have equity in it
- Live in the home as a primary residence (6+ months per year)
- Live in a single-family home, 2- to 4-unit dwelling, or an FHA-approved condo
- Have adequate funds for a down payment, if purchasing a new home**
- Have the ability to pay taxes and insurance, though no specific credit score requirements exist
There are a few types of reverse mortgages to consider. A certified reverse mortgage specialist can help you select between:
Proprietary Reverse Mortgages
These are private loans backed by the companies who develop them.
Home Equity Conversion Mortgages (HECMs)
These are federally-insured loans back by the US Department of Housing and Urban Development (HUD) and enable you to withdraw home equity for use on any purpose. The amount you can borrow with a HECM reverse mortgage depends on factors like age, type of mortgage, home appraised value, current interest rates, and financial assessment of your ability to pay taxes and insurance.
Home Equity Conversion Mortgage for Purchase (H4P)
These are a sub-type of the HECM option backed by the FHA that enables seniors to purchase a new primary residence and obtain a reverse mortgage all in one transaction. An H4P may be right for you if you are able to use cash on hand to pay the difference between the HECM proceeds and the sale price plus closing costs of your new purchase. While not available in all areas, an H4P may allow you to:
- Build a new custom home
- Relocate to be closer to friend and family
- Purchase a home in a senior living community
- Downsize to a smaller home
- Purchase a primary residence more suitable for your needs
- Purchase a new home with better accessibility and modern amenities