Reverse mortgages may sound like an amazing retirement hack — put cash in your pocket, no monthly payment, and you get to continue living in your house. But if we’re being honest, in most cases they are really only a last resort tool, not a first option.
If you desperately need money for home repairs, or taxes, and qualify for a small government backed version, sure reverse mortgages make sense. Taking out lump sums just because it seems like “free money”? Not a great idea.
Imagine owning a house. Now imagine that you take the value you have acquired in that house – your equity – and trade in some of it for cash. That is basically what a reverse mortgage is.
The catch? You don’t pay the bank back each month- the balance grows and the loan will be paid back when you:
- Move out,
- Sell the house, or
- Die (harsh but true).
It is basically the reverse of a normal mortgage- instead of you paying the bank back monthly, the bank just waits and collects back later.
Who Is Eligible For One?
There are a few stipulations, and you should not try to bypass them:
- Must be 62 or older
- Must be an owner of a home (and preferably with equity – preferably all the way paid off)
- Must be your primary residence (it cannot be a vacation home)
- Must complete a counseling session prior to signing any paperwork
If you are not 62, or not actually residing in the home, then no reverse mortgage for you!
How Does Someone Access Their Money?
There are three standard payout options – like choosing how to have your fries:
- All at once (lump sum)
- Monthly income
- A line of credit to borrow against as needed
The majority of retirees typically will select monthly payments, as it can appear to be a replacement for a paycheck.
You Are Still Responsible For Bills
Many believe a reverse mortgage pays for everything about residential living, but this isn’t fact. You will still be responsible for:
- Property taxes
- Homeowner’s insurance
- HOA dues (if applicable)
Skip out on those bills? The lender can foreclose – yes, even as the one on the deed!
The Expenses
Reverse mortgages come with expenses. While you are not writing monthly checks, the fees accrue gradually in the loan balance. Examples include:
- Origination Fees (or closing costs)
- Monthly service/maintenance fees
- Interest – it is considerably higher than a conventional mortgage.
- Insurance premiums that are required by mortgage lenders.
Therefore, every month you watch your balance grow – sometimes faster than you think. Compound interest is a great thing when it helps compound investments; not here – it works against you.
The Three Types of Reverse Mortgages
Not all reverse mortgages are the same; there are three types of reverse mortgages:
| Type | Where It Comes From | What It’s For |
|---|---|---|
| Single-Purpose Reverse Mortgage | Local gov’t or nonprofits | Specific needs only (taxes, repairs, insurance) |
| HECM (Home Equity Conversion Mortgage) | Federally backed | Most common — flexible use |
| Proprietary Reverse Mortgage | Private companies | Higher loan amounts, no federal limits |
There’s also a neat little thing referred to as the “right of rescission.” You have three business days after signing the paperwork to cancel without penalty.
Who Uses These
The majority of people that apply for a reverse mortgage fall into the following groups:
- Retired
- House rich
- Cash poor
Translation: you have a home that is worth a significant amount of money, but your bank account is not. Rather than selling the house, you borrow against it.
You’ve probably heard of a mortgage: it’s the thing you pay on for 15–30 years to acquire the house. A reverse mortgage is the odd opposite: you already own the house and the bank gives you money instead.
There are no monthly payments, and there is no repayment schedule – just a looming balance sitting there until you need it, or life has deemed it necessary to change.
So… Should You Use One?
Honestly – only if it is necessary to address a specific need.
A great idea if:
- You need assistance keeping a home you care about
- You can qualify for a low-cost, single-purpose version instead
A not-so-great idea if:
- you’re treating it like extra spending money
- you haven’t adequately compared to other options for retirement income
- you don’t understand the long-term financial obligations involved
Would you ever consider taking a reverse mortgage – or does it sound more risky than helpful?
