You’ve seen the ads and heard the promotions, “Tap into your home equity for cash with a reverse mortgage!” So, what is a reverse mortgage exactly and how does it work? With 10 million homeowners 65+ who still have a mortgage, reverse mortgages can be a hot topic in retirement and cash flow conversations.
A reverse mortgage is one avenue homeowners can consider to supplement their cash flow in retirement. Let’s dig into the details of reverse mortgages, the pros and cons and the alternatives to help equip you with knowledge to protect your financial future.
What is a Reverse Mortgage?
To fully understand a reverse mortgage, it is important to grasp the details of a traditional mortgage. A traditional mortgage is a loan used to buy real estate where the borrower agrees to pay the lender over time until the loan is paid.
A reverse mortgage flips the script. A reverse mortgage allows a homeowner, who is at least 62 years old, to exchange equity in their home for cash payouts. These can be paid out in a lump sum, monthly payment or a line of credit. In this scenario, the loan would be required to be repaid with interest when the home is sold.
The concept of a reverse mortgage is typically considered when seniors are looking to supplement their cash flow in retirement. Maybe an inability to work, lack of access to transportation, health conditions or a lack of funds could trigger a homeowner to consider a reverse mortgage to add some extra cash into the mix.
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What are the Pros and Cons?
Pros
- Stay in Your Home: In a reverse mortgage situation, the homeowner gets to stay in their home. For retirees looking for ways to keep their standard of living the same as pre-retirement, this may be a benefit.
- No Taxes on Loan Payout: The IRS considers the money generated from a reverse mortgage a loan advance, not income, so there are no taxes involved.
- Income Producing: A reverse mortgage creates more cash for expenses, medical costs or home improvements.
Cons
- Lose Equity: Reverse mortgage loans dwindle home equity leaving the homeowner and heirs with nothing upon selling the home.
- Cost Increases: The loan balance continues to grow with interest and high fees.
- Debt Passes to Heirs: Upon the death of the homeowner, the debt passes to heirs to work through.
What are Alternatives?
Looking for a few other options? There are additional methods to creating a little more room in your retirement budget like downsizing your home, cutting household expenses or even refinancing. Take a look at even more reverse mortgage alternatives here.
Want more? Check out our blog Over 55 Communities: What You Need to Know
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Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.
