Turning Home Equity into Retirement Income with a Reverse Mortgage

Answer

A reverse mortgage lets qualified homeowners age 62 and older convert part of their home equity into cash without making monthly principal and interest payments. Unlike a traditional mortgage, you don’t repay the loan until the last borrower leaves the home, sells it, or passes away.

Here’s how a reverse mortgage typically works:

• Eligibility: You must be at least 62 years old and own your home outright or have a low mortgage balance that you can pay off at closing with proceeds from the reverse loan.
• Loan Types: The most common option is the FHA-backed Home Equity Conversion Mortgage (HECM). Some lenders also offer proprietary reverse mortgages for higher-value properties.
• Payment Options: You can choose to receive funds as a lump sum, fixed monthly payments (tenure or term), a line of credit, or a combination. Each choice affects how fast you draw equity and how much interest accrues.
• Interest and Fees: Interest compounds over time on the outstanding balance. Expect upfront costs—mortgage insurance (for HECMs), origination fees, appraisal, and closing costs—typically totaling 2–5% of your home’s value.
• Homeowner Responsibilities: You retain title and must keep the property in good repair, maintain homeowner’s insurance, and pay property taxes. Failure to meet these obligations can trigger loan repayment.
• Repayment Trigger: The loan becomes due when the last borrower permanently moves out, sells the home, or dies. At that point, you or your heirs can repay the balance in cash or by selling the home. Any remaining equity beyond the loan balance belongs to you or your estate.

Key advantages include:

• No monthly principal and interest payments during the draw period.
• Flexibility to tailor cash flow via different disbursement plans.
• Non-recourse loan—heirs never owe more than the home’s value at sale.

Consider these drawbacks before proceeding:

• Compounding interest can erode home equity over time.
• Upfront fees and mortgage insurance premiums raise initial costs.
• Heirs may have fewer assets if sale proceeds cover the loan balance first.

Most borrowers use reverse mortgage proceeds for home improvements, supplementing retirement income, or healthcare expenses. For official details and current HECM limits, see the HUD website.

Before applying, it’s advisable to compare offers from multiple lenders and discuss your situation with a HUD-approved counselor. Buyers are recommended to verify all terms and consult a licensed attorney or financial planner to ensure a reverse mortgage aligns with your long‑term goals.