If you had asked a senior who saw their precious nest egg cut in half in the 2008-09 Great Recession but was able to lean on their reverse mortgage line of credit — until their stocks and bonds had a chance to rebound — they would likely tell you it was a good idea.
If you had asked a house-rich, cash-poor older American whose only source of steady income was Social Security — before they took out a reverse mortgage loan to increase their monthly cash flow and start an emergency fund — they would likely tell you it was a good idea.
And if you posed this question in 1961 to the first person ever to receive a reverse mortgage, Nellie Young, the widow of a beloved football coach — on the verge of losing her home because of the loss of her husband’s income — she would likely have said it was a good idea.
There are all kinds of outstanding uses for a reverse mortgage loan. Some include creating more cash flow for paying everyday expenses and monthly bills, paying off ruinous high-interest credit card debt, investing in key home improvements to make your home safer, and building a medical safety net in case you need long-term healthcare.
Yet, a reverse mortgage is not a government benefit. It is a loan based largely on your built-up home equity that must be paid back. Now, it’s true the loan does not typically have to be repaid until you leave your home, which could be years or even decades after you first take out a reverse mortgage, but it doesn’t mean it is a loan without risk.
For example, although there are no monthly mortgage payments to make with a reverse mortgage loan, you are still obligated to maintain your home and pay property taxes and homeowners insurance as conditions of your loan. If you fail to honor your loan terms, your reverse mortgage loan could default and lead to foreclosure.
Also, if you don’t have a solid plan for your reverse mortgage, which you have crafted in careful consultation with your financial planner and other trusted financial professionals, you could find yourself outliving your reverse mortgage funds. Fortunately, most reverse mortgages offer six different payment options, including tenure (monthly payments for life) and modified tenure (monthly payments for life plus a line of credit) plans. However, even with these tenure options you need to continue meeting your ongoing property tax, homeowners insurance, and home maintenance obligations.
A reverse mortgage loan can add another important cash flow stream to your retirement, but like any financial instrument, first learn how it works — including your responsibilities and obligations under the loan — before deciding whether it’s a good idea for you.
Is a reverse mortgage ever a good idea?
Ever since a widow received the first reverse mortgage — helping her stay in the home she loved — older Americans have continued finding new, strategic uses for reverse mortgages, such as preserving their investment portfolios, expanding their emergency funds, and providing for their long-term healthcare needs.
Will I still have a mortgage to pay with my reverse mortgage?
Yes, because a reverse mortgage is still a mortgage loan. However, unlike a traditional mortgage that you must soon begin repaying after the loan closes, you don’t have to repay a reverse mortgage until you sell your home, move, pass away, or fail to honor your loan terms. With a reverse mortgage, you no longer have monthly mortgage payments, but you must continue to meet your ongoing property tax, homeowners insurance, and home maintenance obligations.
Is a reverse mortgage line of credit like a home equity line of credit (HELOC)?
Both require that you have home equity you can borrow against. However, a reverse mortgage offers far more flexibility. Unlike a HELOC, a reverse mortgage line of credit can never be revoked, regardless of the value of your home. It also contains an important growth feature not offered by a HELOC, so if you leave your line untouched until you really need it, you could find your line of credit far larger than when you initially received it.