Is a Reverse Mortgage Right for You?

Written By
Paul Tracy
Updated January 16, 2021

The longer you live in your house and make mortgage payments, the more you build up the value of the house. That value is known as equity, and it can be turned into cash without selling the house, or taking on any more monthly bills.

The way that you would turn equity into cash is through a reverse mortgage.

A reverse mortgage is different from the mortgage you took out when you bought your home because with this kind of loan, you don’t make monthly payments to the lender. The lender gives you money, which doesn’t have to be paid back as long as you live in your home.

However, the loan does have to be repaid if you die, or sell your home. You would also have to repay the loan if the house was no longer your primary residence, meaning you no longer spend most of your time there.

To qualify for a reverse mortgage, you must be at least 62 years old and you must currently live in your home. The money you receive from a reverse mortgage is usually tax-free, and many reverse mortgages don’t require you to have a certain income level.

You can use the money for a lot of reasons, like making home improvements, supplementing your retirement income, or paying for healthcare expenses not covered by your health insurance.

The most commonly used reverse mortgage is called a Home Equity Conversion Mortgage (HECM), which is backed by the U.S. Department of Housing and Urban Development (HUD). The reason these loans are popular is because they have no income or medical requirements, and the money you borrow can be used for any reason.

When you apply for a HECM, the first requirement is to meet with a counselor from a housing counseling agency. The agency you select must come from a government-approved list. The idea is that these counselors, who aren’t associated with HUD, will give you an unbiased explanation of what you are about to take on.

Part of that explanation must include how much the loan will cost, how it will affect your finances, and what alternatives there are besides taking out a reverse mortgage.

The amount of money you can borrow with a HECM depends on your age, what type of reverse mortgage you choose, the value of your home, interest rates, and in what geographical area you live. In most cases, the older you are, the more valuable your home is, and the less you owe on it, the more money you can borrow.

You choose how the loan is paid to you. One way is to have monthly cash advances for the same amount given to you either for a specific period of time, or for as long as you live in your home.

The second way is to choose a line of credit. This lets you use as much of the loan amount as you need whenever you need it. The third choice is a combination of monthly payments and a line of credit.

When is it a good idea to apply for a reverse mortgage? If you are relying on Social Security to pay your expenses during your retirement, a reverse mortgage can provide some necessary extra cash each month. It may also make sense to take out a reverse mortgage if you have no heirs, or your heirs don’t want to inherit your home.

Keep in mind that there are also some good reasons not to apply for a reverse mortgage. The closer you are to age 62, the less money you will be able to borrow. That’s because the bank is repaid the loan money when the house is sold, which may mean 20 plus years after you take out the loan. Naturally, lenders don’t want to have large sums of money outstanding for that long, so they prefer to deal with older borrowers.

Many reverse mortgages require that the homeowner pay back the full loan balance plus interest if the homeowner leaves the house for a specific period of time, such as being temporarily confined to a nursing home.

Then there is the question of how a reverse mortgage may affect your Medicare eligibility. According to most state law, a home’s unused equity won’t be counted against you when you are applying for Medicare as long as you are currently living in the home. This rule applies for homes that are valued up to $500,000.

If your property is worth more, you may want to take out a reverse mortgage and use the money for living expenses. However, that cash you get is subject to Medicaid's new rules about how far in advance you can reduce your assets and still be eligible to apply.

The best way to decide if this is a good choice for you is to talk to a Medicare eligibility specialist before you apply for a reverse mortgage.

The InvestingAnswer: Reverse mortgages can affect your finances in many ways that you may not realize. Before you apply for one, talk to a financial advisor to see whether or not taking out a reverse mortgage may work against you in the long run.

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