Reverse mortgages enable eligible borrowers to take a significant amount of cash out of their homes. Depending on the type of reverse mortgage, borrowers can take cash out in a single lump sum, through equal monthly disbursements or draw down a line of credit over time. The most compelling features of a reverse mortgage are that borrowers do not make monthly mortgage payments plus the proceeds from a reverse mortgage are tax-free. The downside to a reverse mortgage is that your mortgage balance increases over the life of the loan which can erode the equity you have in your property. The reverse mortgage balance is due in full when the borrower sells or vacates the property or refinances the loan.
To qualify for a reverse mortgage at least one borrower must be at least 62 years old and the borrowers must demonstrate the ability to pay for ongoing monthly housing expenses including taxes, insurance and property maintenance. Additionally, reverse mortgages are best-suited for borrowers with significant equity in their homes. The more property equity you have, the greater the proceeds you can receive from a reverse mortgage.
When fully understood and used properly, reverse mortgages offer significant financial benefits to borrowers. Below we outline some of the top reasons to get a reverse mortgage and explain how borrowers can use this financing option to access the equity in their homes for a multitude of purposes. Borrowers who want to eliminate their monthly mortgage payment, payoff debt, improve their finances and cash flow, pay for a major expense such as a home renovation or potentially retire may find a reverse mortgage to be an attractive financing option. A reverse mortgages is not without risks but can be a highly effective tool that helps borrowers realize their personal and financial goals. Review the reasons and explanation below to understand how a reverse mortgage can potentially work for you.
One of the most popular reasons to get a reverse mortgage is to eliminate your monthly mortgage payment. With a reverse mortgage, instead of making a monthly mortgage payment and paying down your mortgage over time, your monthly interest expense is added to the principal balance of the mortgage. Adding the monthly interest expense to the mortgage means your reverse mortgage balance increases over time but it also means you have no monthly payment. Eliminating your mortgage payment typically removes one of your largest monthly expenses while significantly enhancing your financial freedom and flexibility.
Our Reverse Mortgage Guide explains how a reverse mortgage works and outlines key program benefits
Borrowers who get a reverse mortgage are required to pay off their existing mortgages. Additionally, in many cases borrowers with funds remaining after paying off their mortgages decide to pay off or pay down debt such as credit card or car loans.
For example, a borrower with 10 years remaining on a $300,000 30 year fixed rate mortgage with a 5% interest rate has an approximately $148,000 mortgage balance and a $1,610 monthly mortgage payment. Assuming the value of the borrower’s property is $400,000, the borrower can obtain an approximately $240,000 reverse mortgage. After the borrower uses the proceeds from the reverse mortgage to pay off his or her existing mortgage balance of $148,000 and closing costs of approximately $5,000, the borrower has $87,000 remaining that can be used for a variety of purposes, including paying off debt. The borrower may elect to pay off a credit card bill that cost hundreds of dollars per month.
Depending on the value of your property, a reverse mortgage can enable borrowers to pay off hundreds of thousands of dollars in total debt which, which can dramatically improve your financial position.
Paying off your existing mortgage and other debt significantly reduces your monthly costs and improves your cash flow. This reason for getting a reverse mortgage is especially applicable for borrowers who live on fixed incomes. Using a reverse mortgage to lower your monthly costs enables borrowers to stretch their monthly income farther.
Using the same example as above, a borrower with a $300,000 30 year fixed rate mortgage with a 5% interest rate can use a reverse mortgage to eliminate his or her $1,610 monthly mortgage payment and possibly hundreds or even thousands of dollars in other monthly debt expense. Slashing several thousands of dollars in monthly expenses provides a significant boost to your cash flow.
Understand the pros and cons of a reverse mortgage
Borrowers who do not have a large mortgage balance or significant monthly debt can invest the proceeds from a reverse mortgage to generate supplemental income. Although current investment returns are relatively low, even a modest increase in income improves your monthly cash flow. Borrowers should be sure to fully understand the risks involved before they invest the proceeds from a reverse mortgage.
Improving monthly cash flow with a reverse mortgage enables borrowers to spend more money on the things they want instead of struggling to pay the mortgage and other bills.
Many borrowers want to do a significant home remodeling or renovation project but do not want to incur additional debt to or increase their monthly mortgage payments. A reverse mortgage enables borrowers to access a significant amount of equity in their homes for a major home renovation while eliminating their mortgage payment at the same time. For example, a borrower with a $150,000 mortgage balance could obtain a $250,000 reverse mortgage and after paying off the existing mortgage balance and closing costs, have approximately $95,000 in proceeds remaining for a home remodeling project.
For many borrowers, a reverse mortgage is a more attractive option for financing a major home remodeling project than a cash-out refinancing, home equity loan or line of credit. A refinancing, home equity loan and line of credit all require the borrower to make ongoing monthly loan payments as compared to a reverse mortgage which eliminates the borrower’s current mortgage balance and requires no monthly payments.
In some cases, borrowers who currently own a home sell their existing property and combine the proceeds with a reverse mortgage to downsize and buy a smaller home. For example, if you have a home valued at $600,000 with a $400,000 mortgage balance you could sell the home and use the approximately $165,000 in proceeds (after commissions and closing costs) as the down payment on a new home that you purchase with a reverse mortgage. Assuming you make a down payment of 50%, you could purchase a new home valued up to approximately $330,000. So you have downsized from a $600,000 house to a $330,000 house but you have eliminated your monthly mortgage payment by purchasing your new home with a reverse mortgage.
One of the best features of a reverse mortgage is that there are no restrictions on the use of proceeds after you pay off your existing mortgage (if you have one). You can use a reverse mortgage to remodel your home, buy a new home or even pay for college tuition for a child, grandchild or yourself. Borrowers with smaller existing mortgage balances have the opportunity to use a reverse mortgage to take a significant amount of cash out of their homes. What the borrower decides to do with the money is up to them.
Before getting a reverse mortgage, borrowers should make sure they have sufficient income or funds to pay for monthly housing expenses such as property taxes, homeowners insurance and property maintenance. With the right financial plan in place, a reverse mortgage can provide borrowers with significant funds to pay for ongoing housing expenses and also enable them to realize additional financial goals including paying for college.
Because one borrower must be at least 62 years old, reverse mortgages are popular with people who are retired or nearing retirement. In some cases, borrowers with significant equity in their homes can use the proceeds from a reverse mortgage to accelerate their retirement. Although borrowers must demonstrate the ability to pay for ongoing housing expenses, unlike regular forward mortgages, borrowers do not need to be employed or generate significant income to qualify for a reverse mortgage. So getting a reverse mortgage does not impose the 15-30 year financial burden of a regular mortgage that requires ongoing monthly payments to pay off the loan. Just the opposite, when implemented properly, a reverse mortgage can provide borrowers with greater financial freedom by enabling or enhancing their retirement.
Use the FREEandCLEAR Lender Directory to find lenders that offer reverse mortgages in your state
“What is a reverse mortgage?” CFPB. Consumer Financial Protection Bureau, August 30 2019. Web.