Who benefits from a reverse mortgage?

Reverse mortgages are ideal for retirees who don't have a lot of savings or cash investments, but do have a lot of equity built up in their homes. A reverse mortgage allows you to convert an otherwise illiquid asset into cash that you can use to cover retirement expenses. They are a constant stream of income that lasts for years. You can turn your home equity into a pile of money without having to move.

A reverse mortgage allows eligible borrowers to live the rest of their lives in their home without monthly mortgage payments. It doesn't take as much income to qualify for a reverse mortgage compared to a traditional term loan. Reverse mortgages have many advantages. In the right situation, they 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.

Reverse mortgages take part of the net worth of your home and convert it into payments for you, a kind of prepayment on the net worth of your home. While these loans don't involve monthly mortgage payments, inverted mortgage borrowers still need to keep up with their home insurance, property taxes, and homeowners association (HOA) fees. Home Equity Conversion Mortgages (HECM) are federally insured reverse mortgages backed by the United States. Reverse mortgages are best for those with sufficient and consistent income to cover the regular costs of owning a home.

Many large banks have stopped issuing reverse mortgages, although they are still available in smaller banks and credit unions. HECMs and reverse property mortgages can be more expensive than traditional home loans, and the initial costs can be high. Many retirees find a surplus of free time on their hands, and a reverse mortgage can benefit by providing them with additional income to make the most of their new free time. If you have the right borrower profile and an eligible home, a reverse mortgage could be an excellent financial planning tool for retirement.

However, tax rules can be complicated, so be sure to consult a tax professional for advice before committing to a reverse mortgage. Overall, 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. Basically, reverse mortgages were redistributing wealth from the poor to the predominantly middle class. So, if you think the appraised value of your home may fall in the future (all HECMs require at least one or two appraisals), a reverse mortgage could be a way to capitalize on your home's equity now.

If you're considering applying for loans from private reverse mortgage lenders, qualification requirements 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.

Harry Lammel
Harry Lammel

Unapologetic lover of life. Award-winning family man. Typical husband and father. Music junkie. Food buff.