The truth about Reverse Mortgages
- No monthly payments.
- You still live in your home, you remain the owner.
- You can choose from monthly income, lump sum, or line of credit.
- The money you receive is tax-free.
- The interest rates are lower than traditional mortgages.
Does the quote above sound like something you may have said? I hear some version of this all the time from homeowners that I speak with.
On the one hand, the run-up in home prices since 2012 has left U.S. homeowners with a record amount of home wealth. Current homeowners with mortgages are sitting on an average of $207,000 in equity that they could access while still keeping a 20% equity buffer. In total, American mortgage holders have more than $11 trillion in tappable equity, the most in history.
But on the other hand, everything is more expensive — especially housing. It was common to hear stories of how homeowners would enter retirement with a lot of home equity, sell their home, downsize to a smaller and much cheaper one, then use the remaining cash to fund their retirement. Now, those smaller homes are often too expensive. Plus, recent interest rate increases make it even more difficult to lower your housing expenses if you move.
In this environment, a home equity conversion mortgage (HECM) — also called a reverse mortgage — can be a great option to help fund your retirement. It’s often overlooked or misunderstood. Frankly, there have also been some bad actors in the past that have taken advantage of seniors. Nevertheless, there are at least five benefits to a reverse mortgage:
1. You don’t make any monthly payments
Your current mortgage on your home (if you have one) goes away, and you don’t make any monthly payments on the money you receive from the reverse mortgage.
2. Stay in your home — you’re still the owner.
You can make improvements, sell, or stay there as long as you’d like. Reverse mortgages are available to folks as young as 55, but some programs require you be at least 62.
3. You receive either a monthly income, a lump sum payment up front, or a line of credit.
The amount you receive depends on your age, property value, and interest rate. The older you are, the more equity you’ll have access to.
4. The money you receive is tax-free
The income you get from a reverse mortgage isn’t taxable because the IRS considers the money loan proceeds.
5. The interest rates are currently lower than for traditional mortgages
Based on our research, you’ll likely pay less interest with a reverse mortgage than a similar cash-out refinance, home equity loan, or home equity line of credit.
It’s called a “reverse mortgage” because the lender makes payments to the homeowner, instead of vice-versa. The money you receive is repaid when you or your eligible spouse passes away or leaves the house.
As always, the trick is getting unbiased advice. There are many different reverse mortgage options, and it’s worth comparing these against other options to access your home equity, like a cash-out refi, HELOC, home equity loan, or shared equity agreement. What’s right for you depends on your unique financial profile and goals.
At House Numbers, we specialize in helping you consider these options.