As retirement approaches, financial stability becomes a priority for many homeowners. One option worth considering is using a reverse mortgage to pay off an existing mortgage. This strategy can offer immediate financial relief and greater peace of mind, but it also requires a thorough understanding of how to maximize a reverse mortgage’s capabilities for an optimal retirement strategy.

Understanding Reverse Mortgages

A reverse mortgage allows homeowners aged 55 or older to convert a portion of their home equity into cash. Unlike a traditional mortgage, where the borrower makes monthly payments to the lender, a reverse mortgage pays the homeowner. The loan is repaid when the homeowner sells the house, moves out permanently, or passes away. The homeowner does not lose any ownership in their home. They retain the title and control over their property.

The Financial Appeal

1. Eliminating Monthly Mortgage Payments: One of the most appealing aspects of a reverse mortgage is the elimination of monthly mortgage payments. By paying off your existing mortgage with the proceeds from a reverse mortgage, you can significantly reduce your monthly expenses. This can be particularly beneficial for retirees living on a fixed income or those still working who would like to retire.
2. Accessing Home Equity Without Selling: Reverse mortgages allow homeowners to tap into their home equity without having to sell their homes. This can be an excellent option for those who want to stay in their homes and maintain their independence while still accessing the funds they need.
3. Flexible Payment Options: Reverse mortgages offer various payment options, including a lump sum, monthly payments, a line of credit, or a combination of these. These are payments to the homeowner based on the amount of equity available once their regular mortgage is paid off. This flexibility can help meet your financial needs and goals.

Considerations and Potential Drawbacks of a Reverse Mortgage

1. Costs and Fees: Reverse mortgages come with various costs, including origination fees, closing costs, servicing fees, and mortgage insurance premiums on FHA loans. The costs differ based on the kind of reverse mortgage you get. The fees for a FHA HECM reverse mortgage are regulated by the government; the proprietary reverse mortgages do not have a mortgage insurance premium. You should compare the options to find the optimal loan to meet your needs.
2. Impact on Inheritance: Since a reverse mortgage is a loan based on the amount of home equity, it can affect the inheritance left to heirs if the home value doesn’t continue to grow. It’s crucial to discuss this aspect with family members and consider it in your estate planning. When you call for a loan estimate, we will provide an amortization schedule which will show the estimated loan balance and home value growth over time to make it easier to project the future equity available, based on the current home value growth rate for your area.
3. Requirement to Maintain the Home: Homeowners are still responsible for property taxes, homeowner’s insurance, and maintenance. Failure to meet these obligations can lead to loan default and foreclosure. This is not a requirement that is exclusive to reverse mortgages. Many traditional mortgages require the homeowner to not let the home fall into disrepair as well.
4. Potential Reduction in Public Benefits: Proceeds from a reverse mortgage can affect eligibility for need-based public benefits such as Medicaid. It’s important to consult with a financial advisor to understand how a reverse mortgage might impact your benefits. There may be work arounds they can suggest for this such as setting up a Medicaid Asset Protection Trust (MAPT). 

The Process for Getting a Reverse Mortgage

1. Counseling: Before obtaining a reverse mortgage, homeowners must undergo counseling from a HUD-approved counselor. This step ensures that borrowers understand the loan terms, costs, and alternatives. In most cases this is just a phone call where they review the information we have provided you.
2. Application and Approval: After counseling, you can apply for a reverse mortgage. We will assess your eligibility based on your ability and willingness to pay your property taxes and homeowners insurance moving forward, as they are not included in the reverse mortgage like they are with a traditional mortgage. Some homeowners choose to set up and escrow account to pay these, but it does reduce the amount of proceeds available at closing.
3. Paying Off the Existing Mortgage: The reverse mortgage proceeds first pay off the existing mortgage. Any remaining funds are then available for use as per your choice.
4. Receiving Funds: Once approved, you can choose how to receive any funds available after your mortgage is paid off—whether as a lump sum, monthly payments, a line of credit, or a combination.

Is A Reverse Mortgage Right for You?

Deciding whether to use a reverse mortgage to pay off your existing mortgage depends on your financial situation, goals, and needs. It’s a decision that requires careful consideration and consultation with financial advisors and family members. If you’d rather not pay off your first mortgage but would still like to access your equity as a lump sum of cash, read about our HomeSafe 2^nd home equity loan HERE.

For those looking to reduce monthly expenses and stay in their home without the burden of monthly mortgage payments, a reverse mortgage can be an excellent tool. However, it’s essential to weigh the costs, impacts, and long-term financial plans.

Using a reverse mortgage to pay off your current mortgage can provide financial freedom and stability in your retirement years. Most people who carry a traditional mortgage into retirement never pay it off. The cash you put into your mortgage payment each month for principal and interest may be better utilized elsewhere to benefit your lifestyle and health. It’s a significant decision that involves understanding the benefits, costs, and long-term implications. By thoroughly exploring this option and seeking professional advice from us, you can make an informed choice that best suits your financial needs and lifestyle goals.

Remember, your home is not just a place to live; it’s a valuable financial asset that can help secure your future. By unlocking its equity wisely, you can enjoy a more comfortable and worry-free retirement.