A reverse mortgage has emerged as a valuable retirement tool for homeowners aged 62 and above. Unlike traditional mortgages, a reverse mortgage allows homeowners to convert a portion of their home equity into cash without the need for monthly mortgage payments.
But what can a reverse mortgage be used for? In this article, we will explore the diverse range of possibilities that a reverse mortgage offers, enabling retirees to enhance their retirement years and achieve their unique financial goals.
Let’s dive in.
What is a Reverse Mortgage and How Does it Work?
Before discussing what a reverse mortgage can be used for, let’s first define what a reverse mortgage is.
A Home Equity Conversion Mortgage (HECM) is a loan that is exclusively available to homeowners aged 62 years or older who have equity built up in their homes. The home must also serve as the primary residence of the homeowners, and it cannot be utilized for acquiring a vacation property or an investment asset.
A HECM reverse mortgage is similar to other loans such as a regular mortgage, a home equity loan, or a home equity line of credit (HELOC) with some significant differences.
This financial tool offers homeowners an opportunity to access their home equity without assuming additional monthly mortgage payments. When obtaining a reverse mortgage, older homeowners are able to pay off their existing mortgage, if applicable, and alleviate themselves from the associated monthly payments.
It is important to note when obtaining a reverse mortgage, the property remains in the possession of the borrowers, not the lender. This means that homeowners are still responsible for fulfilling the obligations of homeownership such as paying property taxes, homeowner’s insurance premiums, and keeping the home in good, maintained condition.
For any remaining equity leftover after the traditional mortgage is paid off, borrowers can choose from various options for receiving their funds. They can opt for a lump sum payment, monthly installments, a line of credit, or a combination of these options.
The reverse mortgage loan balance is paid back when the homeowner decides to sell the property, when the home ceases to be their primary residence, or in the unfortunate event of the homeowner’s passing.
A HECM reverse mortgage is backed by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA).
What are the Reverse Mortgage Requirements?
Reverse mortgages have distinct requirements that differ significantly from traditional mortgages. Here are the key points to consider:
- Age. To qualify for a HECM reverse mortgage, at least one of the homeowners must be 62 years of age or older.
- Residency. The home designated for the reverse mortgage must be the primary residence of the homeowners. It is not possible to obtain a reverse mortgage for a second home or an investment property.
- Equity. Homeowners are required to have equity accumulated in their home to be eligible for a reverse mortgage. The exact amount will vary depending on the lender and the current interest rates.
- Property Type. The eligible property types for a reverse mortgage include single-family homes, two-to-four-unit properties where the homeowners occupy one of the units, townhouses, FHA-approved condominiums, or manufactured homes that meet HUD’s requirements.
- Maintenance and Fees. The home must be well-maintained and in good condition. Homeowners are responsible for the ongoing maintenance of the property, as well as paying property taxes and insurance.
What Can Reverse Mortgage Funds be Used for?
There are no restrictions on how homeowners may use the money acquired through a reverse mortgage. The funds can be used according to the homeowners’ preferences and needs.
Below are some of the common purposes that homeowners use a reverse mortgage for.
Supplement Retirement Income
One of the most common uses of a reverse mortgage is to supplement monthly income. This may be necessary if you find that your pension or Social Security benefits aren’t cutting it.
A reverse mortgage helps free up monthly income in two ways. First, it helps by eliminating monthly mortgage payments. Second, it helps by giving homeowners additional money coming in each month
Make Home Renovations
A reverse mortgage is an option for those looking to make major home renovations or home repairs. This may be especially necessary for those who have lived in their home for years and have significant home improvements that need to be made. This may also be necessary for those who have physical limitations, and they want to make it more accessible.
Since a reverse mortgage allows homeowners to tap into the equity they have built in their homes over the years, it typically provides them with a substantial sum of money to fund such projects.
By using a reverse mortgage, individuals can transform their property into their dream home without straining their current budget.
Pay Off Credit Card Debt or Personal Loans
Using reverse mortgage proceeds to pay off credit card debt can offer a practical solution for individuals burdened by large amounts of consumer debt going into retirement.
A reverse mortgage offers the advantage of not requiring immediate repayment, as the loan is typically repaid when the homeowner sells the property or passes away.
This deferred payment structure can provide much-needed financial relief and allow individuals to focus on improving their overall financial health.
Cover Healthcare Costs
A reverse mortgage can be used to pay off medical bills. But it can also be used to pay for future medical expenses that can be pricey such as home health care.
If you have large medical bills to pay off, you will want to receive at least some of your funds as a lump sum. If you are looking to use a reverse mortgage to cover future medical expenses, you will want to choose to receive your funds as a line of credit.
If you have traveling aspirations for your retirement, the funds from a reverse mortgage can be used to help cover these costs.
As a Retirement Tool
If you are heading into retirement, and you don’t think you have enough saved in your retirement accounts to last through retirement, a reverse mortgage may help.
A federal survey found that most Americans in the years leading up to retirement don’t have enough money to retire on even when combined with Social Security benefits.
While a reverse mortgage used to be considered as an option for older homeowners who were in a desperate financial situation, experts are now recommending that a HECM loan can be used as an important financial tool in someone’s retirement plan.
“Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed,” retirement income expert Dr. Wade Pfau explained.
For example, a reverse mortgage can increase cash flow, which is typically a top concern of retirees.
In the event of a declining market during retirement, retirees can rely on a reverse mortgage to provide them with financial support while they wait for the market to recover.
Purchase a New Home
Additionally, it is worth mentioning that a reverse mortgage can even be employed to purchase a new home, a concept known as a reverse mortgage for purchase or HECM for purchase.
When purchasing a home, the usual options are to either pay cash or make a down payment and finance the rest through a traditional mortgage, requiring monthly payments to pay off the loan.
A HECM for purchase provides a third option. With this program, borrowers typically put around 50% down and use a HECM loan to cover the remaining balance.
Unlike a traditional reverse mortgage that provides cash in various forms, the HECM for purchase allows borrowers to use the funds specifically for buying a home, with any remaining money going to the borrower.
If you want to learn more about how this works, we recommend talking to one of our HECM for purchase experts who will be able to answer all of your questions.
Can you withdraw money from a reverse mortgage?
It depends on how you opt to receive your funds. Your choices are to receive your funds as a lump sum, monthly payments, or a line of credit. If you choose to receive your reverse mortgage funds, yes, you are able to withdraw money from your reverse mortgage.
What is the most common use of a reverse mortgage?
Most reverse mortgage customers use the funds to cover basic needs such as covering monthly expenses or to cover other more immediate needs such as paying off consumer debt, according to the National Council on Aging (NCOA).
The goal for reverse mortgage borrowers when taking out a HECM loan is to make it possible for them to stay in their current home longer, NCOA added.
While there are no rules about how reverse mortgage funds must be used, they are not typically used for travel or similar discretionary costs.
Is money from a reverse mortgage taxable?
A reverse mortgage is a loan, so it is not considered income. For this reason, the money received from a reverse mortgage is not taxable.
Virginia woman Marjorie Fox told The New York Times that one of the reasons she decided to get a reverse mortgage even though she had significant retirement savings is because if she found that she needed extra cash for a specific reason, she would rather take the money from her tax-free reverse mortgage line of credit than her IRA where she would have to pay taxes on withdrawals.
What are the restrictions on a reverse mortgage?
As mentioned previously, there are no restrictions on how reverse mortgage funds can or can’t be used.
That being said, there are obligations that must be met in order to continue to keep the loan. These obligations include keeping the home as the primary residence, staying up to date on property taxes, paying homeowners insurance, and any HOA fees, if required.
What is the maximum amount you can get from a reverse mortgage?
The Federal Housing Administration (FHA) sets a lending limit for HECM reverse mortgages every year. The current FHA lending limit for 2023 is $1,089,300.
The amount you will be able to borrow will depend on a combination of factors such as the home value, the age of the oldest borrower, and the interest rate.
If you have a home that has more equity than the FHA lending limit, several major reverse mortgage lenders, including Mutual of Omaha Mortgage, offer a proprietary reverse mortgage, also known as jumbo reverse mortgages, that typically allows homeowners to borrow up to $4 million.
In conclusion, a reverse mortgage is a versatile financial tool that offers numerous possibilities for homeowners aged 62 and above. It allows retirees to enhance their retirement years and achieve their unique financial goals.
With a reverse mortgage, homeowners can supplement their retirement income, make home renovations or repairs, pay off credit card debt or personal loans, cover healthcare costs, fulfill their travel aspirations, and even purchase a new home through the HECM for purchase program.
The funds acquired through a reverse mortgage can be received as a lump sum, monthly payments, or a line of credit, providing flexibility and convenience. It’s important to note that reverse mortgage funds are not subject to taxation, offering additional financial benefits.
While there are obligations to be met, such as maintaining the property as the primary residence and keeping up with property taxes and insurance, a reverse mortgage can be a valuable tool for older homeowners seeking stability and financial freedom in their retirement years.
Before taking out a reverse mortgage, it is always recommended that you discuss this decision with your family members and financial advisor.
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Reverse mortgage borrower must occupy home as primary residence and remain current on property taxes, homeowner’s insurance, the costs of home maintenance, and any HOA fees.
This information is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.