When Does It Make Sense to Get a Reverse Mortgage?

Retirement is supposed to be carefree — a time when you can finally step back and enjoy the life you’ve built. However, given the rising cost of living, many retired seniors are running into more financial problems than they anticipated.

Some of these seniors take out reverse mortgages to improve their cash flow. These mortgages let you turn equity in your home into cash, but they aren’t without cost.

Here’s a closer look at how reverse mortgages work and when it makes sense to get one.

How Does a Reverse Mortgage Work?

A reverse mortgage allows you to borrow money using your home as collateral. You can choose to receive the money in a lump sum or monthly payments.

However, unlike home equity loans and home equity lines of credit (HELOCs), you don’t have to pay toward the loan balance each month. Instead, the balance of the mortgage goes up over time, and the loan is repaid in full when you pass away or sell the home.

This might sound like a great way to turn your home equity into cash without worrying about monthly payments. In some cases, it is. However, not every homeowner can access a reverse mortgage.

These are some of the key conditions:

• You must be at least 62 years old
• You must own your home outright or have significant equity
• The home must remain your primary residence
• You must keep the home in good condition
• You must continue to pay property taxes
• You must continue to pay homeowners’ insurance

With a reverse mortgage, your home stays in your name. However, if the loan is not repaid after your death, your lender can foreclose on the house.

When Does a Reverse Mortgage Make Sense?

In the right situation, a reverse mortgage can make your life significantly easier. These are some of the circumstances where taking out a reverse mortgage makes sense.

You’re Planning on Staying in Your Home

If you’re planning on aging in place, a reverse mortgage may be right for you. It will allow you to access a substantial amount of money and live more comfortably, knowing that the loan will be repaid when your heirs sell your home.

You’re Having Trouble Managing Expenses

Is retirement costing more than you expected? You’re not alone. The lump sum or periodic payments you receive from a reverse mortgage may make it easier to handle both routine and unexpected expenses.

Note that the IRS doesn’t tax money from a reverse mortgage as income.

You Can’t Qualify for a Home Equity Loan

You may find it much easier to qualify for a reverse mortgage than a home equity loan, especially if you’re retired. Even if your credit score is poor or your income is low, you might still be able to get a reverse mortgage.

When Does It Not Make Sense?

Reverse mortgages aren’t right for everyone. These are some instances where getting one may not be the best option.

You’re Planning to Move

If you intend to sell your home and move in the near future, a reverse mortgage might not be practical. Reverse mortgage closing costs are often higher than those of traditional loans, so you may lose more money than you anticipated.

You Might Need to Move to an Assisted Living Facility

Because reverse mortgages require you to keep your home as your main residence, a permanent move to assisted living typically means the loan becomes due.

Many reverse mortgages have a 12-month rule: If you move out of the home for a full year, the loan balance is due immediately.

You’re Concerned About Eligibility for Benefits

Although the IRS doesn’t count loan proceeds as income, in rare instances, a reverse mortgage can affect eligibility for Medicaid. This is more likely to be true if you choose to receive the amount as a lump sum, since this sum will be counted toward your assets.

If you exceed your state’s Medicaid asset limit, you won’t be eligible for coverage.

Looking for a Low-Stress Retirement?

Reverse mortgages let you benefit from the home equity you’ve worked hard to build. If you’re considering a reverse mortgage or have already decided it’s the right option for you, get in touch with us!

South River Mortgage specializes in reverse mortgages, and our knowledgeable agents can help you decide whether this is the next best financial step for you.

Get an instant quote on your home by using our instant quote form right here.