For many approaching retirement, a home is their most valuable asset. Home equity — the value of a home minus any outstanding mortgage debt — often represents a significant source of wealth. One way to access that equity is through a reverse mortgage, which lets you convert part of your home’s value to cash without selling.

Reverse mortgages are an option for some older homeowners, but they come with potential downsides that should be very carefully considered. If you need reverse mortgages explained, this guide will help educate you about reverse mortgages.

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Reverse mortgages: What are they and how do they work?

A reverse mortgage is a loan available to homeowners over 62 who want to borrow tax-free cash against the equity in their primary residence. 

Unlke a traditional mortgage, where you borrow money and make payments to a lender, a reverse mortgage does the opposite — the lender pays you. You can choose to receive money as ad lump sum, monthly payments, a line of credit, or a combination of these options. 

Unlike a mortgage or a home-equity line of credit (HELOC), you don’t have to make payments to the lender; however, the balance that you owe on your house increases. Your loan becomes due when one of the following three events occurs:

• You sell your home: In this case, you’ll need to use part of the sale proceeds to repay the debt. 
• You permanently move out: Even if you own the property, you must repay the lender if you leave your home. 

• You pass away: If you die with a reverse mortgage loan outstanding, your estate must repay the loan balance.

Features and Considerations

A reverse mortgage can be used for a variety of reasons for adults aged 62 and older who may be struggling financially and have built up equity in their house, generally over 50% It's important to carefully consider your needs when making a financial decision.

Avoiding the need to move

 A reverse mortgage allows you to access your home equity while staying put, helping you avoid the disruption and cost of moving. 

High costs

Reverse mortgages often have higher costs than traditional loans, including origination fees, closing costs, mortgage insurance, and servicing fees. These fees are added to your loan balance, increasing the amount owed.

Obligation to pay taxes/insurance/HOA fees

Even without monthly payments, you’re still responsible for property-related expenses. These include property taxes, homeowners insurance, flood insurance (if applicable), and homeowners association (HOA) fees. Failure to stay current on these payments can result in foreclosure.

Loss of home equity

Borrowing against your home decreases your equity in it. This can limit your ability to sell or refinance later, especially if property values decline, and may affect long-term financial stability. 

Impact on heirs

When you pass away, the reverse mortgage becomes due. Your heirs must repay the loan balance, typically by selling the home. If they want to keep the property, they must repay the loan themselves, often within a limited timeframe.

Potential Medicaid/SSI eligibility issues

In some cases, proceeds from a reverse mortgage may count as assets, which could affect your eligibility for needs-based benefits like Medicaid or Social Security Income (SSI). This depends on how funds are received and used, so careful planning is essential.

Things to consider when reviewing a review mortgage option?

Before you proceed with any reverse mortgage you should discuss your options. Some other important considerations include the following:

Do you plan to stay in your home long-term?

If you move, you have to pay your reverse mortgage back. 

Can you lose your home with a reverse mortgage?

While you don’t have the same exposure to payment delinquency you do with traditional mortgages, you still need to pay property taxes, homeowners insurance, and other housing-related costs. If you don’t keep up with these payments, the lender can initiate foreclosure proceedings.

Is leaving your home to heirs a priority?

If leaving your home to your children or other family members is a priority, be aware that a reverse mortgage can complicate things. Heirs may be forced to sell the property unless they have the resources to pay the loan. 

Does credit matter in reverse mortgage underwriting?

Reverse mortgage approval relies more on home equity than on your credit score. Still, lenders will assess your capacity to keep up with property-related costs. 

Are you already on Medicaid or SSI?

A reverse mortgage can impact your eligibility for Medicaid or SSI. If you receive these benefits, you should consult a benefits advisor before moving forward. 

Other Options to Consider

Home equity loan or HELOC

Both a home equity loan and a HELOC let you borrow against your home equity while keeping your property. A home equity loan provides a lump sum with fixed payments over time. A HELOC works like a credit card with a lower interest rate — you draw funds as needed and pay interest only on the amount you use. 

Cash-out refinance

If interest rates have dropped since you bought your home, a cash-out refinance can lower your rate and provide a lump sum of cash based on your equity. Keep in mind this resets your mortgage term, potentially extending your repayment timeline.

Downsizing or relocating

Selling your current home and moving to a less expensive property is another way to contribute funds to your retirement account. For example, if you sell your house and have $150,000 left after the transaction, you could set aside $50,000 in a high-yield savings account. You could put the remaining $100,000 into an immediate annuity that will provide you with monthly payments, similar to a pension or salary. 

This article is intended for educational and informational purposes only and not intended to provide guidance on whether a reverse mortgage fits your particular financial situation.