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If You Need Help Funding Your Retirement, You May Want to Consider a Reverse Mortgage

Retirement is supposed to be the reward for decades of hard work, but the perks don’t feel so great if you’re short on cash. That’s where a reverse mortgage may be able to help.

These mortgages help homeowners 62 years and older tap into the equity they have built in their homes. Homeowners don’t need to pay back the money they borrow until they move, sell the property, or pass away.

“When people are in or near retirement, they often need greater liquidity,” said Lorraine Geraci, New American Funding’s reverse division talent and strategic business manager. “[Reverse mortgages] provide cash they can use for other retirement needs or goals without the burden of a monthly bill. It can also help [them to] purchase a new home without taking on a traditional mortgage payment.”

What’s the catch? Well, reverse mortgages come with eligibility requirements, and potential consequences for heirs. That’s why it’s important to understand the fine print.

What is a reverse mortgage? How can you qualify for one?

With a reverse mortgage, homeowners borrow against the equity in their homes. Instead of making a monthly loan payment, the bank pays the borrower.

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). The loan has been overseen by the federal government since the late 1980s.

To qualify, you or your partner must be at least 62 and live in the home as your primary residence. You’ll also need to own your home outright or have equity in the home, typically about 50%. You will also need to show you can pay property taxes and insurance. You will also need to attend a reverse mortgage counseling session approved by the U.S. Department of Housing and Development (HUD).

“[The counseling] is one of several safeguards in place to ensure they fully understand the process and aren’t being pressured into making a decision that goes against their will or best judgment,” Geraci said.

Some companies also provide their own reverse mortgages, according to Geraci. While those loans work similarly, they have different eligibility requirements that will vary by state and company.

Can a reverse mortgage help fund retirement?

An elderly couple meeting with a loan officer in their home.

For retirees on a fixed income, a reverse mortgage can provide funds that can be used for anything from everyday expenses and medical bills to home renovations or travel.

Unlike traditional loans, there are no monthly repayments. The loan must only be repaid if the homeowner sells the home, permanently moves, or passes away.

Geraci said there are two types of people who are best suited for a reverse mortgage.

“The first is someone or people who need to free up cash flow for a variety of needs and wants,” she said. “Many people going into retirement still have a traditional mortgage on their house. So, if there’s enough equity in the property, a reverse mortgage can pay off that traditional mortgage.”

Then there are those who may have a financial portfolio, assets with a financial advisor, or even multiple properties or investments they have established.

“Using home equity in a reverse mortgage way can allow those people to either sustain or build wealth in retirement,” Geraci said.

What are the risks of reverse mortgage?

A senior couple looking at paperwork and a laptop.

While reverse mortgages can be helpful, they do not make sense for everyone. The borrower must maintain the primary residence of the home. Therefore, these loans may not make sense if you’re planning to move in a few years.  

“Just like with any other refinance, there are fees associated with it,” said Geraci. “When you have fees, the longer you keep it, the better off [you may be.]”

A reverse mortgage may also not be a good fit if a person has more debt than they have the home equity to pay off.

The other thing for borrowers to consider is their heirs. After the owner passes away, the heirs will have to decide whether to pay off the loan to get the home or sell it and pocket the proceeds less the debt.

Before making a decision about a reverse mortgage, borrowers may want to speak with a financial advisor and their heirs to ensure they understand all their options.

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Contributing Writer, New American Funding

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