If you’re concerned about having the funds to sustain a comfortable retirement, a reverse mortgage can support the lifestyle you’ve worked so hard to achieve.
Some people take out home equity loans, but a reverse mortgage can help retirees generate extra money or reduce their living expenses by allowing eligible borrowers to convert some of their home equity into income-tax-free funds*. Its flexible repayment feature gives homeowners and homebuyers age 62 and older more freedom in how they manage their monthly expenses. But before considering a reverse mortgage solution, here are 10 things you need to know.
- Unlike a traditional home equity loan or home equity line of credit, a reverse mortgage has a flexible repayment feature: You can pay as much as you like toward principal and interest each month, or defer repayment — the choice is yours.
- While monthly mortgage payments are optional, as with any mortgage the borrowers must meet their loan obligations, keeping current with property insurance, taxes, any homeowners association (HOA) fees, and maintenance.
- If you move, pass away, or sell the home, the loan balance must be repaid.
- However, you can opt to pay down your principal and interest if and whenever you choose; no pre-payment penalties apply.
- The home must be your principal residence and meet the standards set by the United States Department of Housing and Urban Development (HUD)† on property type and condition. To meet these standards, you may be able to use your reverse mortgage to pay for any required repairs.
- When you take out a reverse mortgage, the bank has a lien on your home just as it would with a traditional mortgage. But as the borrower, you will still own the home, with your name on the title. Of course, you must meet your loan obligations, keeping current with property insurance, taxes, any homeowners association (HOA) fees, and maintenance.
- Depending on your needs, you can choose to receive your funds as:
- A line of credit that offers the benefits of a traditional Home Equity Line of Credit, but with certain advantages including greater flexibility
- Monthly advances, either for a set period or as long as you live in your home
- A lump sum
- A combination of these**
You can even change how you receive your available funds in the future, if your situation changes.
- A reverse mortgage can improve your monthly cash flow, and help you pay for large expenses. For example, you could refinance your existing mortgage and consolidate auto loans and high-interest credit card debt to reduce your bills. Funds can also be used for a new car, or a major home renovation. You can even use the funds to help you buy a home that better suit your needs.
- A reverse mortgage can help you establish a “standby” line of credit that you can tap into as needed to alleviate financial worry and gain peace of mind. Think of it as an emergency fund: the money will be there when you need it most. By having the funds from a reverse mortgage line of credit available, you may avoid having to sell stocks or other assets, so you can hold onto investments and continue to collect interest or dividends.
- With a reverse mortgage loan, there are consumer protections in place to help ensure that you’re making wise choices. Among these:
- As part of the loan process, each potential borrower must meet with an independent, FHA-approved† counselor to objectively ensure that they understand the reverse mortgage process, what it entails and the individual terms of their loan.
- With an FHA-insured† reverse mortgage, known as a Home Equity Conversion Mortgage (HECM), you’ll never owe more than the home is worth when the loan is repaid. This is known as the “non-recourse” feature.
- There are limitations on the amount of available funds a borrower can take at closing and in the first 12 months of the loan. This is to help your home equity last longer.