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Reverse Mortgages: Facts You Need to Know Before Applying


by Nathan Hoffman

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When you reach retirement age, you may find that your ability to enjoy it is limited by your available cash. Taking a cut in your income is common when you retire, but it is not ideal. One way to supplement your income is with a reverse mortgage. Here are some facts you need to know before applying.

Retired man living next to the ocean
The reality is that few can afford to live on the beach in retirement

A Reverse Mortgage is Not Like a Regular Mortgage

The first fact you need to know about a reverse mortgage is it is not a standard home loan. It is a loan only available to people of retirement age (at least 62). The reverse loan is specially designed to assist you during retirement without increasing your financial burden. It is called a reverse mortgage because it is a loan that can pay you consistently for as long as funds are available. It doesn't require you to repay your reverse mortgage lender at regularly set times.

Your Home Must Qualify for a Reverse Mortgage

Another fact about reverse mortgages is you cannot automatically qualify for one just because you own a home and are 62 years of age. The home must fit specific standards. A tool called a reverse mortgage calculator is used to determine how much equity you can take out of your home. That tool also factors in government standards preventing you from borrowing the full value of your home at once.

If the total value of your home is too low, there will not be enough equity to borrow. Additionally, a condition of a reverse mortgage is anyone signing the loan agreement must reside in the home. Therefore, you cannot request a mortgage on a property where you do not consistently live, even if you are the property owner.

You Must Personally Qualify for a Reverse Mortgage

Your personal reverse mortgage qualifications also extend beyond age. The amount the reverse mortgage calculator determines you can borrow will come out of your home equity until you pay it back. For the length of that loan, you still own the property. Therefore, you have all the responsibilities associated with owning it, including the obligation to pay the property taxes. You must submit to a credit check and demonstrate you have the means to properly maintain the property before you can get a reverse mortgage.

You Choose How You Get and Spend Reverse Mortgage Funds

You can select how to receive reverse mortgage funds after some funds are initially deducted. Those funds must be used to pay reverse mortgage fees and, if you have a standard home loan, to pay off that loan balance. The remaining funds are doled out to you on an as-needed basis, in a lump sum single payment or in partial ongoing monthly distributions. You choose. Spending the reverse mortgage funds is also your choice. There are no restrictions on the purposes for the funds beyond needing to pay off any existing loan you have, if applicable.

Your Reverse Mortgage Can Last for Many Years

You do not have to fully pay a reverse mortgage back for as long as you live in the home. That means your reverse mortgage can last for many years. Such a long-term loan has benefits and drawbacks. An advantage is you can enjoy your retirement without the constant stress of trying to make loan payments. A disadvantage is a reverse mortgage can accumulate a lot of interest. Therefore, when you finally do repay it, you must pay a lot more money than was initially borrowed.

About the Author 

Nathan Hoffman

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