Worried About Outliving Your Money? Consider a Reverse Mortgage

January 5, 2021

For many seniors, the question “what if I outlive my money” is one that looms in the background and creates a lot of anxiety. There are lots of ways to make retirement funds stretch. You can work a little longer or get a part-time job after retirement. Maybe you can find ways to cut expenses or downsize. Getting a reverse mortgage is another option. Simply put, a reverse mortgage is a way for you to take out equity on your home. You don’t have to pay it back until you move out permanently. In the rest of the article, we’ll explain this tool of senior money management in detail. 

A reverse mortgage is a financial tool that allows people 62 years or older to get part of the equity in their home as tax-free income. You have to own your home free and clear. If you only have a small amount left to pay on the mortgage, you will be required to pay it off with some of the funds from the reverse mortgage. There are other requirements, including using the home as your primary residence, being current with property tax payments, homeowners insurance, and other legal obligations. The property has to be in good shape. Single-family homes, townhouses, condos, manufactured homes built after 1976, and multi-family buildings with four units or fewer are all eligible. 

Be Sure to Research Reverse Mortgage Types Before Deciding

There are several different types of reverse mortgages. You need to research each type and decide which makes the most sense for your situation. The most common is the Home Equity Conversion Mortgage (HECM) is the most common and is backed by the federal government. They are only available through lenders approved by the Federal Housing Administration (FHA). Funds can be used however the borrower wants, though there can be higher costs up-front. Borrowers must receive HUD-approved counseling before closing. 

You can also opt for a proprietary reverse mortgage. This is a private loan and is not backed by the federal government. You may be able to get more money through this type of loan, especially if your house is worth a lot. 

Finally, you can look at a single-purpose reverse mortgage. These can only be used for one purpose. Often this is for remodeling to make a house handicap-accessible. They are typically for less money than the other two and are offered by nonprofits or state or local agencies. 

Whichever type of reverse mortgage you decide on, don’t expect to be able to borrow the full value of the house. An HECM has a limit on the amount you can borrow. For 2020, that amount is $765,600. The principal limit will vary depending on the age of the house, the age of the borrower, and current interest rates. 

With an HECM, there are two options: variable interest rate and fixed interest rate. With a variable rate HECM, you can choose from several disbursement options. You can get equal monthly payments for as long as you live in the house or for a fixed period of time. You can also have a reverse mortgage that acts like a line of credit, which you access until it runs out. And there are combination disbursements, which combine a fixed monthly payment with a line of credit. If you have a fixed rate HECM, you will only be able to get a lump sum. 

Consult a Senior Money Management Expert Before Choosing a Reverse Mortgage

You should be sure to shop around to get the best deal on the costs that go along with a reverse mortgage. These costs include a Mortgage Insurance Premium, an origination fee, servicing fees, and third party fees. Be sure to get a detailed breakdown of fees from any lender you’re considering. Before signing on with any lender, it’s a good idea to speak with a HUD-approved counselor. This person will be an independent third party who can advise you on the pros and cons of any reverse mortgage you’re considering. They are experts in this aspect of senior money management and can help you avoid scams and high pressure tactics and get back to living your best life! 

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