Steps To Retiring With A Reverse Mortgage

By Jean Folger 

Many people haven’t saved enough to cover 10, 20, 30 or especially 40 years of retirement expenses, but many have one major asset: a home. If you’re a homeowner and at least 62 years old, you may be able to convert your home equity into cash using a reverse mortgage, a financial product that allows you to borrow against the equity in your home to get a fixed monthly payment or a line of credit.

Interest accrues on the payments you receive, and repayment is deferred until you become delinquent on your taxes and/or property insurance, the house falls into disrepair, you move, you sell the house or you pass away. 

If you are looking for a source of long-term income to cover basic living expenses, medical care and other retirement expenses, a reverse mortgage might be a good option. Here’s a quick look at how to retire with a reverse mortgage.

1. First, make sure you’re eligible.

To receive a reverse mortgage, you must meet certain requirements:

Note: eligible property types include single-family homes, manufactured homes (built after June, 1976), condominiums, townhouses, and two-to-four unit homes (as long as you occupy at least one of the units).

2. Compare loan types.

There are different types of reverse mortgages, but the Home Equity Conversion Mortgage(HECM) is the most common. HECM loans are issued by private banks and insured by the Federal Housing Administration (HECMs are the only reverse mortgage products with a government guarantee).

There are no income limitations or medical requirements, although you must not be delinquent on any federal debt and have the resources to pay ongoing property charges, such as taxes and insurance. There are also no restrictions on how the money can be spent, so you can use it to supplement your income, pay for medical care, a home remodel, or anything else. One drawback is that the maximum loan amount is limited to the lesser of the home’s appraised value, sales price or the HECM FHA mortgage limit of $625,500.

Non-HECM loans are also available from various lending institutions. These loans are available in amounts that are higher than HECM loans. However, these mortgages are not federally insured and can be considerably more expensive than HECM loans. Few non-HECM loans are made, and usually only to very high-value homes.

3. Choose your payment option.

You have several options for how you receive the money from a reverse mortgage. You can select:

Don’t worry if your needs change over time. You should be able to change your payment option at any time for a small fee, as long as you haven’t drawn all the funds already. Check with your lender to make sure you’ll be able to make changes.

4. Consider Medicaid and Supplemental Security Income.

Social Security and Medicare benefits are not affected by reverse mortgages. If you have – or are planning to apply for – Medicaid or Supplemental Security Income, however, it’s important to note that any funds you retain count as an asset, which could make you ineligible for these benefits. It is generally recommended that you use any reverse mortgage proceeds immediately to avoid any potential problems.

5. Review before signing.

First you need to make sure you fully understand the terms and are confident about the lender.

In addition, if you're married, be sure to talk through the implications of what happens to the surviving spouse when one of you dies. It is generally simpler to have both names on the mortgage, but this won't be permitted if a younger spouse is less than 62 years old when the mortgage is taken out. Even if both spouses are at least 62, be wary of taking out the mortgage only in the name of the older spouse (to obtain more money). If the younger spouse is the survivor and does not have his/her name on the document, staying in the home could be difficult.

The Bottom Line

A reverse mortgage is a major financial decision that requires careful consideration. In addition to the substantial costs involved, it’s important to remember that your debt increases over time due to the interest on the loan.

Reverse mortgages are “nonrecourse” loans, meaning that you (or your estate) will never owe more than the home’s value (even if the loan exceeds this value).