What is a Reverse Mortgage and Is It Right for You?

As people age closer to retirement, they may wonder about the different ways to increase their financial enjoyment of retirement. One of the most advertised ways for seniors to do so is via a reverse mortgage. You may have seen TV commercials with famous celebrities touting reverse mortgages – as well as advertisements on social media and magazines – but are wondering if it’s right for you. While it may seem like a scam, for the right person it actually is a great option but it's also important to understand the process and your rights.

Let’s go over some of the basics regarding reverse mortgage, the pros and cons, and whether or not you should consider opting into one.

What is a reverse mortgage?

Even if you aren’t approaching retirement, you should still be aware of what a reverse mortgage is to be properly informed. A reverse mortgage, put simply, is the practice of borrowing against your own home equity as a source of extra funds. While you cannot borrow the entire amount of your home’s equity, you can borrow a sizable portion if you’re in the right financial position. Unlike a regular mortgage, where you pay back the lender the amount loaned to you to buy a home, a reverse mortgage is paid to you by the lender. However, there are some criteria involved in qualifying for a reverse mortgage that you need to know before you make a decision.

How do you qualify?

If you’ve been wondering what it takes to even qualify for a reverse mortgage, here are a few requirements you must meet:

• Be 62 years of age or older

• Live in the home as the primary resident

• Be up to date on property taxes, homeowner’s insurance, and the like

• Maintain good overall upkeep of the home

• Own the home outright or be able to pay off the remaining mortgage with the proceeds

While there are other criteria that could pop up depending on where you live, the above requirements are especially important in qualifying for a reverse mortgage.

Pros

Depending upon where you are in the financial equation, you can find several positives in getting a reverse mortgage.

1. You can use the funds to better enjoy your retirement.

2. You can use the proceeds from the reverse mortgage to pay off any remaining mortgage and completely own your home.

3. You can use the funds to pay off any remaining debt or other expenses.

4. If you pass away, your spouse can remain in the home even if they aren’t listed on the mortgage.

Cons

There are also some definite reasons to be cautious about getting a reverse mortgage.

1. Your home equity will decrease by default due to borrowing from your home value.

2. If you do not make monthly payments on it, interest rates will gradually increase the value of the loan.

3. If you do not stay on top of your property taxes and homeowner’s insurance, you will likely have to pay your loan.

4. There are several fees that go into a reverse mortgage that may not make it ultimately worth acquiring.

What do real estate professionals think about a reverse mortgage?

"It works for seniors that have paid off all or most of their mortgage and have assets on their hands. It works if they need extra living expenses and while selling the house might be another option, it may not be appropriate for their situation, especially if they can't move." Katie Nobel, Park City Utah Realtor®

"Some borrowers may see this as a form of a HELOC, but it's not. You don't have to make monthly payments to pay back the loan like a home equity line of credit as long as you live in th ehouse. It's also not as difficult qualifying." - Sara Mehrpouyan, Sherman Oaks Realtor®

"They sound confusing, which is why it's important to have a great lender that really understands the process and will be honest if this is really the best option for you. Don't go with someone that just wants to sell you." - Alex King, Fort Myers Realtor®

In the end, you must decide what’s right for you and your family. Consider consulting with a nonprofit consulting agency that specializes in reverse mortgage counseling to see if you can afford it.