Is a Reverse Mortgage Right for Me?

Photo Courtesy: kate_sept2004/iStock

For those preparing for retirement or who’ve already retired, a reverse mortgage is a potentially reliable source of long-term income. With a reverse mortgage, you tap your home’s equity and receive payments from a lender, all without having to make monthly payments on the loan. That gives you access to cash you can use for a range of purposes, from boosting your monthly income to making home updates and more.

However, a reverse mortgage isn’t necessarily right for everyone. Before you start applying for a reverse mortgage, it’s critical to determine if one is genuinely a good fit. Here are a few points to consider.

Do You Want to Age in Your Home?

According to the AARP, about 75% of adults aged 50 and older prefer to stay in their current homes as long as they can. If you’re among them, then a reverse mortgage is potentially a decent fit.

With a reverse mortgage, you don’t make monthly payments to the lender while you remain in the home. Instead, repayment is only required if you choose to move or if you pass away. As a result, it’s a solid fit if aging in place is your plan.

However, if you don’t envision remaining in your house long-term, a reverse mortgage isn’t always a great choice. You’ll have to repay the money as soon as you sell. Since reverse mortgages come with fees and interest, that can take a big bite out of your equity. As a result, not tapping your equity is possibly better, allowing you to benefit more from the sale.

What’s the Value of Your Home?

The amount you receive from a reverse mortgage is tied to your home’s equity. As a result, the value of your house compared to any related debts – such as traditional mortgages and HELOCs – plays a role in how much you’ll receive.

Additionally, the fair market value of your home impacts your eligibility for specific types of reserve mortgages. For example, a home equity conversion mortgage (HECM) through the Federal Housing Administration (FHA) has a mortgage limit of $1,089,300 in 2023.

If your home is worth more than that amount, you can’t tap equity beyond a maximum of 75% of that figure if you’re using an FHA HECM. However, you can potentially access more equity by going with a different reverse mortgage type, such as a proprietary reverse mortgage through another lender.

How to Make the Decision

Determining whether a reverse mortgage is right for you is a personal decision. Generally, if you have ample equity, your home value is substantial without going over any lender limits, and you prefer aging in place, a reverse mortgage is worth considering. You can use one to secure ongoing monthly income, get a lump sum for home improvements, or achieve other financial goals, all without paying payments to a lender monthly.

However, if you don’t intend to remain in the property or have limited equity, a reverse mortgage might provide little value. As a result, it’s potentially better to look for alternative ways to increase your income or achieve your financial goals.