The Truth About Reverse Mortgages: Are They Right for You?
As you approach retirement, maintaining your lifestyle without a steady paycheck may be one of the many things that are on your mind. Many retirees turn to reverse mortgages, allowing them to access their home's equity and use that money to provide funds for financial longevity during this time in their lives.
With a reverse mortgage, the bank provides funds based on the home's value and the age of the youngest homeowner, and repayment is only required when the homeowner sells the home, moves out for a consecutive year or longer, or after the homeowner passes.
Reverse mortgages offer flexibility and may provide a much-needed boost to your retirement income. However, they also come with responsibilities that require careful consideration to make sure they are a good fit for you.
"Many people in or near retirement are looking for ways to supplement their retirement income. They want more cash, they want liquidity," said Lorraine Geraci, Reverse Talent and Development Manager at New American Funding.
What to know before applying for a reverse mortgage
Nearly 33,000 Home Equity Conversion Mortgages (HECMs), a type of reverse mortgage, were backed by the Federal Housing Administration (FHA) in 2023. Homeowners increasingly used reverse mortgages to access their home equity, with an average amount of approximately $490,000, according to the FHA annual Report to Congress for the 2023 fiscal year.
While the number of HECMs in the U.S. dropped significantly between 2009 and 2019, this trend reversed in recent years, reaching a record high in 2022. However, the total Reverse Mortgage count for 2023 fell to 32,963, about half of the 2022 peak, according to the FHA Annual Report to Congress.
This decline was mostly due to higher interest rates, which reduced the amount borrowers could tap into from their home equity and decreased refinance activity.
Despite the recent changes, the overall rise in reverse mortgages over the past decade shows that more retirees recognize their value as part of their financial strategy, even during changing economic times.
Geraci shares that reverse mortgages are increasingly used by financial advisors, real estate professionals, home care companies, attorneys, builders, CPAs, and accountants as a part of their estate planning strategies.
"There's also the ability to purchase a new home with a reverse mortgage. People can relocate in their retirement. Maybe they want a property in a different area to be closer to family members," said Geraci. "They could also want to downsize their property in retirement, or they want to be able to purchase a vacation or an investment home."
Reverse mortgages may offer flexibility whether homeowners want to stay put, move closer to family, or explore new investment opportunities during retirement.
Comparing alternatives: weighing your options
Reverse mortgages aren't the only way to get money from your home.
Home equity loans, for example, give you a lump sum you repay with interest over time. But with a reverse mortgage, you don't have to repay the loan until you sell your home, move out, or pass away. This gives you more flexibility.
"Reverse mortgage refinances are very similar to home equity loans, giving them a percentage of their equity to use as cash as necessary. However, with the reverse mortgage, the homeowner does not have to repay the loan in the form of a monthly payment," said Geraci.
Geraci noted that the homeowner is still required to pay their property taxes, maintain homeowners insurance, and cover various other property charges when necessary.
If you're thinking about downsizing, selling your home could give you the money to buy a smaller property and maybe have some cash left over. But moving isn't always the best option.
Real-life scenarios: When a reverse mortgage makes sense
A reverse mortgage could make financial sense for those retiring with a balance on their mortgage.
"Almost half of the people retiring now carry a mortgage into retirement. So, it's making it harder for them to retire comfortably," said Geraci.
By turning your home equity into cash with a reverse mortgage, you can pay off your mortgage (depending on the loan balance) and free up your income to enjoy retirement without the burden of a required monthly payment.
Another example could be unexpected medical costs and long-term care. "Some people want to better prepare for potential home care or long-term care needs, especially since long-term care insurance can be expensive," said Geraci.
Geraci also shares a story of how she helped a woman in New York struggling with hoarding and had years of garbage piled up in her home. With no financial resources, the woman's son reached out to Geraci.
"To get her a reverse mortgage, the property needed to be cleaned up because it wouldn't pass inspection. My assistant and I took it upon ourselves to clean out the home, bagging up 350 bags of garbage and donating the rest," said Geraci.
This effort allowed the woman to get a reverse mortgage, giving her a monthly income for the rest of her life and allowing her to stay in her home.
Avoiding pitfalls: tips for managing your reverse mortgage wisely
While reverse mortgages can offer big benefits, they also come with responsibilities. You'll need to keep paying property taxes, homeowners’ insurance, and maintain your home. Therefore, managing your money carefully is key.
Planning with a financial advisor can help make sure your reverse mortgage fits your retirement goals and keeps you on track.
"It's very important to manage your funds wisely,” Geraci said. “That's why there are many safeguards in place to protect older adult homeowners, such as withdrawal limits during the first year, required counseling from an approved agency, and mortgage insurance for the FHA HECM. It’s also important to know that reverse mortgages are non-recourse loans, which means there is no personal liability to pay the loan back, only the value of the home at the time of sale, satisfies the re-payment.”
Take the next step in your homeownership journey with New American Funding.