How Does a Reverse Mortgage Work?

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November 4, 2019

How Does a Reverse Mortgage Work? Featured Image

If you’re retired or are approaching retirement age, you’ve undoubtedly seen quite a few advertisements about reverse mortgages. Perhaps you’ve been thinking about whether it would be a good idea for you to access some of your equity to use toward everyday bills.

Before you make this decision, it’s important to understand how reverse mortgages work and what your alternatives might be.

Reverse Mortgage Basics

Reverse mortgages allow homeowners to access up to 55 percent of the equity in their homes. Only those who are 55 years of age or older will qualify for this type of mortgage. You can choose to receive the money as a lump sum or as regular monthly payments that supplement your other retirement income. 

There are only two service providers that offer these types of mortgages, and the interest rates on them tend to be higher than the interest rates on other types of loans. Reverse mortgages tend to be a good option for those who want to stay in their homes and who need some extra money to make ends meet.

How Does a Reverse Mortgage Work? Reverse Mortgage Image

Advantages of Reverse Mortgages

Even though there’s interest on the mortgage, you don’t have to make monthly payments on it. The balance and interest on the reverse mortgage is due when you pass away or when you sell your home. Clearly, this is a big advantage for those who are struggling financially.

It’s also easy to qualify for a reverse mortgage because you don’t need to show proof of income. As long as you’re 55 or older and have some equity in your home, you can qualify. Many people also appreciate that the income they receive from a reverse mortgage is tax-free.

Disadvantages of Reverse Mortgages

Though you’re not responsible for paying off the mortgage immediately, the high-interest rates should play a role in your decision. Eventually, that interest has to be paid, and that means that you — or your kids — will get less money from the sale of your home. It can also make it harder for your kids to inherit the home because they’ll have to pay back the money you borrowed.

Many people are surprised to learn that the only way to get out of a reverse mortgage is to sell the home or to pass away. Reverse mortgages are not like other types of loans where you can pay them off at any time. Additionally, there’s a penalty if you sell the home or die within three years of the date that you got the reverse mortgage.

How Does a Reverse Mortgage Work? HELOC Image

Not a HELOC

Reverse mortgages sound a lot like a home equity line of credit, or HELOC. They’re similar in that they allow you to borrow money against the equity of the home. However, HELOCs have some important differences. With a HELOC, you’re usually allowed to borrow up to 80 percent of the value of the home rather than the 55 percent allowed with a reverse mortgage. HELOCs also tend to have lower interest rates, and you need to make monthly payments on the loan. When you do eventually sell the home, though, those payments have gone back toward increasing the equity, so you benefit.

In short, HELOCs tend to be a better option when you need a quick influx of cash for a one-time expense. Reverse mortgages tend to be a better option for those who need additional income.

How Does a Reverse Mortgage Work? Older Couple Image

Other Options for Retirees

Reverse mortgages tend to be expensive in the long run, so it’s a good idea to look into a few other options. For instance, if you find that you’re short just $100-200 a month, you could find that working a part-time job one or two days a week could give you the money you need while also getting you out of the house. A lot of retirees choose to work at a store that they frequent because they can usually get a discount as an employee.

Another option could be to downsize your home. You could sell your current home, then use the equity to purchase a new place that’s smaller and more affordable, then use the extra money for any other living expenses you have. Brand-new homes are a great choice because you won’t have to deal with the expense of unexpected repairs and the modern building design can significantly reduce energy expenses. You also have hardly any maintenance to worry about!

Reverse mortgages are a good choice for some people, but they’re not the best choice for everyone. If you think that downsizing might be a viable option for you, come check out what we have to offer. You’ll be amazed by how affordable your new home can be.

Click here to get your free guide, Dreaming About Downsizing: Learn to Make the Most of Your Move, today! 

Photo credits: depositphotos.com




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