What Is a Reverse Mortgage?

A reverse mortgage is a loan for people aged 62 years and older obtained through a financial institution or mortgage lending company that uses your home as collateral. When you get a reverse mortgage, the lender gives you access to a set amount of money called the principal limit. The amount you receive is usually a percentage of your home’s value.

Like a traditional mortgage, a reverse mortgage accumulates interest over time. Any money you access will need to be repaid plus interest. However, you usually never need to make a payment during your lifetime. The amount owed becomes due when you pass away and can be repaid from your estate, with proceeds from life insurance or through the sale of your home. Of course, you can make payments on your reverse mortgage during your lifetime if you wish.

Pros of Reverse Mortgages

Reverse mortgages offer a number of benefits for seniors, including the following.

Ability to Age in Place

A reverse mortgage can make it possible for you to retain ownership of your home so you can age in place. You can use funds to pay annual property taxes and make necessary repairs and maintenance to keep your home in good condition. In addition, you can use funds to pay for home health care and other services you may need to remain in your home safely as you age.

Flexible Access to Funds

While you can usually obtain funds as a lump sum, most reverse mortgages also allow you to borrow as you go. When you need money to cover an expense, you can withdraw it from your line of credit. You’ll only pay interest on the amount you borrow, reducing the amount that one day needs to be repaid.

Source of Ongoing Income

Many reverse mortgages provide the option to receive monthly payments rather than a lump sum or an occasional withdrawal. You’re typically free to choose the amount of the payment, so you can use funds from a reverse mortgage to supplement your income and give you more room in your budget to cover ongoing expenses. As a result, reverse mortgages can be beneficial for seniors on fixed incomes who struggle to pay for medications, utilities and other bills.

Elimination of Mortgage Payments

If you currently have a mortgage and can no longer afford payments, you may be able to refinance your existing loan with a reverse mortgage. Doing so can eliminate the need to make your monthly mortgage payments so you can remain in your home.

Potential to Relocate

In some cases, you can use a reverse mortgage to purchase a new home. This makes the program a good option for seniors who wish to move closer to loved ones or enjoy warmer weather as they age.

Protection for Your Spouse

If your spouse is aged 62 or over, they can usually be a co-borrower on your reverse mortgage. However, younger spouses still receive protection through the surviving non-borrowing spouse rule. Thanks to this clause, payments are deferred until the death of your surviving spouse, allowing them to remain in the home without having to pay off the loan.

Cons of Reverse Mortgages

Reverse mortgages do have some disadvantages you should be aware of before you begin shopping for one.

Needs Can Change

A reverse mortgage is only a good option if you plan to remain in your home. If you one day need to downsize to a senior living apartment, you must sell your home and pay off your reverse mortgage. You may also need to sell your home if you must relocate to an assisted living, memory care or skilled nursing community.

Eligibility Rules

To qualify for a reverse mortgage, you’ll need to meet certain requirements. For example, people with a poor credit history or federal tax debt may be turned down for a reverse mortgage. Your home must also pass an inspection before you obtain the loan.

Future Impact

If anyone besides your spouse lives with you, obtaining a reverse mortgage could impact their future. Should you relocate to a long-term care community for more than 12 months, you will typically need to start repaying your mortgage, which might mean selling your home.

Also, if your other assets, savings and life insurance policies aren’t enough to pay off the reverse mortgage, your loved ones (except your spouse) will have to sell your home after your death. Consequently, reverse mortgages may not be the best option if you’re hoping to pass on your home to your children or grandchildren.

Risk for Scams

Although there are many reputable lenders to choose from, some unscrupulous individuals prey upon seniors looking for reverse mortgages. One of the most common scams involves contractors offering reverse mortgages to pay for the cost of home repairs. To protect yourself, only work with lenders approved by HUD.