Using Reverse Mortgage for Retirement Planning

A reverse mortgage is a type of loan that is specific to individuals 62 years of age or older. The purpose of this mortgage is to allow seniors to convert the equity in their homes to cash, which can be used for a number of purposes.

There are many reverse mortgage pros and cons to consider before utilizing one. For instance, borrowers are not required to make monthly mortgage payments to a lender. However, the remaining balance must be paid off when certain scenarios arise.

Retirement planning strategies use these types of loans to help seniors maximize their retirement and access vital cash flow. Some retirees may not have a substantial retirement income but have a bulk of their wealth tied up in equity. 

Those who meet the reverse mortgage requirements can get approved rather quickly. In fact, applying for this type of loan often has less stringent requirements than other mortgages and loan types. To learn more about reverse mortgages and how they may be used in retirement, continue reading the topics below. 

What is a reverse mortgage?

A reverse mortgage is a type of loan available to homeowners 62 years of age or older who have equity in their homes. It allows them to convert part of that equity into cash, which can be used in any manner they need.

With a reverse mortgage, borrowers are not required to make any monthly payments. In fact, they do not need to pay back the loan until they sell the home or otherwise leave it. Instead, the lender makes monthly payments to the borrower. 

This type of loan was designed to help retirees with limited income use the equity in their homes to pay for basic living expenses. It can also be used to help cover the cost of health care. 

Borrowers must understand the reverse mortgage pros and cons before taking one out to determine if it is beneficial for them. Although borrowers are exempt from making monthly mortgage payments, they are required to pay property taxes. They are also responsible for homeowner’s insurance and homeowner’s association fees, if applicable. 

Reverse Mortgage Requirements

The basic reverse mortgage requirements are simple. In order for a borrower to receive this type of mortgage, he or she must:

  • Be at least 62 years of age.
  • Have equity in his or her home.
  • Live in the home as his or her primary residence.

There are certain income requirements established by the Department of Housing and Urban Development (HUD). Some lenders may have additional eligibility criteria, so it is always best to research different lenders before choosing the right one.

How a Reverse Mortgage Can Be Used for Retirement

Retirement planning is an important step for all individuals, regardless of age. Ideally, this planning begins during one’s early years. However, many retirees nowadays are in need of assistance due to some economic downturns. 

Through years of making monthly mortgage payments, borrowers begin to slowly own their home. Home equity is the total portion of a home that a borrower actually owns. Many retirees will use this equity as collateral by taking out a reverse mortgage. 

Retirees who lack accessible cash flow yet have significant equity in their homes benefit the most from this type of loan. It is an ideal retirement investments tool because it allows them to use the cash for important living expenses. Some retirees who still have mortgages can also use the money to pay off their remaining balances. 

Using home equity as a retirement tool is best for those who have a significant amount invested in their homes and do not plan to relocate any time soon. The fees and closing costs can add up to a significant out-of-pocket expense. Therefore, those who plan to sell within the next few years will not reap the benefits of spending that kind of money. 

How to Get a Reverse Mortgage 

The reverse mortgage requirements may differ slightly between lenders, but it is always suggested to find one that is approved by the Federal Housing Authority (FHA). The only government-insured reverse mortgage is offered through the Home Equity Conversion Mortgage (HECM) program. 

In addition to the basic requirements mentioned in the previous sections, HECM applicants must meet the following conditions:

  • Attend a counseling session
  • Complete a credit application process
  • Perform routine maintenance on the home

Those considering a reverse mortgage backed by the HECM can find a list of all available lenders on the U.S. Department of Housing and Urban Development (HUD) website. The application process requires borrowers to submit a bevy of personal and financial information, including:

  • Credit history check.
  • Payment history.
  • Information on outstanding mortgages.
  • 401(k) statement.
  • Income statement.
  • Social Security Number.
  • Pay stubs (if still working).

After the reverse mortgage application is assessed, the lender orders a property appraisal. The appraiser ensures the property meets all FHA guidelines, such as safety features and flood protections. Most closings are complete within 30 days. 

What is the best time to get a reverse mortgage?

Getting a reverse mortgage requires some thoughtful consideration. Applying for this type of loan without being fully prepared can have disastrous consequences. Therefore, borrowers should never rush into the process.

While the reverse mortgage requirements state that the primary borrower must be at least 62 years of age or older, it may be best to wait until both spouses are of age. Plus, the older the borrower is, the more he or she receives. 

The best time to get this type of mortgage is when housing prices are high. The housing market dips and peaks constantly, so it is best to keep a close eye on market values. Borrowers with high property values should consider applying while the market is still favorable. Borrowers who use it as a retirement planning tool can benefit the most when their mortgage is already completely paid off. The loan then becomes a safety back-up plan, and interest will not accrue until the borrower withdraws from it. In a sense, it is only there when the borrower absolutely needs it.