First Steps

How Does a Reverse Mortgage Work and Is It Right for You?

Retirement is a chance to explore new hobbies, do some traveling, or indulge a passion you may not have had time for in your working years. Of course, you have to make sure you can maintain your new lifestyle when you’re relying on your retirement savings, rather than a paycheck, for income.

Tapping into your home’s equity using a reverse mortgage could be a solution. In a 2018 Kiplinger survey, 15 percent of pre-retirees said they’d consider a reverse mortgage for retirement income.

But how do reverse mortgages work? And can one support the retirement lifestyle you’re planning? This brief guide explains the most important things you need to know.

What is a reverse mortgage?

A reverse mortgage, also called a home equity conversion mortgage (HECM), is a special type of home loan available to homeowners aged 62 and older. The difference is that instead of making payments to the lender, the lender makes monthly payments to you. These payments are based on the percentage of equity you’ve accumulated in the home. Typically, you can borrow up to 60 percent of your home’s equity value.

Here’s an example of how much a reverse mortgage may be worth. Assume you retire at age 65, with a home valued at $400,000. You have less than $10,000 remaining on the mortgage. Under those conditions, you may be able to get a loan worth $183,000 to $194,000, which could provide a substantial boost to your existing retirement income and assets.

Reverse mortgage pros and cons

How do reverse mortgages work to a homeowners’ advantage? The biggest benefit is the income it may be able to provide in retirement. If you expect to keep your spending at its current level or increase when you retire, a reverse mortgage may smooth the transition and fill in any gaps left behind when you’re no longer drawing a salary from your employer.

Reverse mortgages may offer flexibility, as the money may be used any way you wish. For instance, you could use it to cover basic living expenses, pay for medical care not covered by your health insurance or Medicare, or fund a trip around the world.

But how do reverse mortgages work when it comes to repayment? A reverse mortgage is, after all, a loan.

The good news is payments are not required as long as you live in the home. If, however, a health issue requires you to move into an assisted living facility full time or you pass away, the loan and any accumulated interest and fees become payable. In other words, it’s not free money. Your or your heirs may be responsible for repaying the loan eventually, which may require selling the home.

Should you consider a reverse mortgage?

Possibly, if you’re looking for a way to create additional income in retirement. Just be aware of the potential implications of having to repay the loan. If you want to pass the home on to your children or grandchildren, for instance, having a life insurance policy in place may allow them to pay off a reverse mortgage and keep the property.

Also, get to know the requirements for a reverse mortgage. Those may include:

  • Being age 62 or older
  • Having a paid-in-full mortgage or owing a small amount on the loan
  • Keeping up with property tax and homeowner’s insurance payments
  • Living in a qualifying home
  • Undergoing a credit check

A low credit score may not necessarily work against you for a reverse mortgage, but you should be prepared for the lender to review your credit history. If you want to give your credit a boost before applying for a reverse mortgage, here are five simple ways to increase your credit score.

By clicking some of the links above, you may go to a third party site. Information and opinions on these sites are not provided by Finance of America Mortgage LLC.

This document is provided by Finance of America Mortgage. Any materials were not provided by HUD or FHA. It has not been approved by FHA or any Government Agency. Finance of America Mortgage LLC is not a tax consultation firm. Please seek advice from a tax professional.

The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, hazard insurance. The borrower must maintain the home. If the borrower does not meet these loan obligations, then the loan will need to be repaid. 

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