How Does a Reverse Mortgage Work?

Here’s a basic breakdown of how reverse mortgages operate:

1. Eligibility Requirements:

   • You must be at least 62 years old.

   • You must own your home outright or have a significant amount of equity.

   • The home must be your primary residence.

   • You must stay current on property taxes, homeowner’s insurance, and maintenance.

2. Loan Proceeds Options:
   You can receive the funds in several ways:

   • Lump sum

   • Monthly payments

   • Line of credit

   • Or a combination of the above

3. No Monthly Mortgage Payments:
   Instead of paying the lender, your loan balance grows over time. Interest and fees are added to the loan balance each month.

4. Repayment:
   The loan becomes due when:

   • You sell the home,

   • You move out permanently (e.g., to a nursing home),

   • Or you pass away.
     The home is usually sold to repay the loan, and any remaining equity goes to you or your heirs.

Benefits of a Reverse Mortgage

• Supplement Retirement Income: Ideal for seniors with limited income but significant home equity.

• Stay in Your Home: No need to sell or move out to access funds.

• Non-Recourse Loan: You (or your heirs) will never owe more than the home's value, even if the loan balance exceeds it.

• Flexible Payment Options: Choose how and when to receive the money.

Risks and Drawbacks to Consider

1. Eroding Home Equity
   Because you’re borrowing against your home, your equity decreases over time. This could leave less (or nothing) for your heirs.

2. Costs and Fees
   Reverse mortgages come with high upfront costs, including origination fees, closing costs, and mortgage insurance premiums.

3. Repayment Triggers
   If you move out of your home for more than 12 consecutive months (e.g., into assisted living), the loan becomes due. This can catch families off guard.

4. Impact on Benefits
   While reverse mortgage proceeds aren’t taxable, they could affect eligibility for needs-based programs like Medicaid or Supplemental Security Income (SSI).

5. Foreclosure Risk
   You must keep up with property taxes, insurance, and home maintenance. Failure to do so could result in default and foreclosure.

6. Inheritance Implications
   Your heirs may need to sell the home or refinance the loan to keep it. If the housing market declines, this could be challenging.

Is a Reverse Mortgage Right for You?

A reverse mortgage can be a useful tool in the right circumstances—especially for retirees who want to stay in their home and need additional income. However, it’s not a one-size-fits-all solution.

Consider a reverse mortgage if:

• You plan to remain in your home long-term.

• You need supplemental income and have limited other resources.

• You understand the long-term implications and have discussed it with your family or a financial advisor.

Avoid a reverse mortgage if:

• You plan to move in the near future.

• You want to leave your home to heirs mortgage-free.

• You’re unable to maintain the home or pay taxes and insurance.

Final Thoughts

Reverse mortgages can offer financial relief and flexibility for older homeowners, but they are complex and not without risk. Before making a decision, consult with a HUD-approved housing counselor or trusted financial advisor. Understand the long-term consequences, talk openly with your family, and make sure the benefits outweigh the costs in your specific situation.