Retirees who don't have a lot of savings or cash investments but do have a lot of equity built up in their homes can benefit from a reverse mortgage. This type of loan allows you to convert an otherwise illiquid asset into cash that you can use to cover retirement expenses. It provides a constant stream of income that lasts for years, and you don't have to move out of your home to access the funds. A reverse mortgage is easier to qualify for than a traditional term loan, and it has many advantages.
It can help you support yourself in retirement, allow you to stay in your home longer, help you pay your current mortgage, and even lower your tax bill. It takes part of the net worth of your home and converts it into payments for you, a kind of prepayment on the net worth of your home. Home Equity Conversion Mortgages (HECMs) are federally insured reverse mortgages backed by the United States. They are available in smaller banks and credit unions, although many large banks have stopped issuing them.
Reverse mortgages can be more expensive than traditional home loans, and the initial costs can be high. Retirees with sufficient and consistent income to cover the regular costs of owning a home can make the most of their free time with a reverse mortgage. Tax rules can be complicated, so it's important to consult a tax professional for advice before committing to a reverse mortgage. The costs and risks of obtaining a reverse mortgage are greater than the cumulative increase in Social Security payments homeowners receive when waiting until full retirement age to apply for benefits.
If you think the appraised value of your home may fall in the future, a reverse mortgage could be a way to capitalize on your home's equity now. Qualification requirements for loans from private reverse mortgage lenders will vary. Only the lump sum reverse mortgage (one-time payment), which gives you all your income at once the loan closes, has a fixed interest rate.