Should You Use a Reverse Mortgage to Retire?

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A reverse mortgage could provide much-needed cash flow, but there is more to the story. 

If you’re retired, or getting close, you might be thinking of how much income you’ll have after retirement and whether it will be enough. Even with Social Security and retirement savings accounts, many retirees might be faced with a substantial drop in income after leaving work for good.

One option that can boost your retirement income is a reverse mortgage.

If you aren’t familiar, a reverse mortgage (as the name implies) works in the opposite way of a traditional mortgage you might use to buy a home. Instead of you making payments to a bank and gradually building equity in your home, a bank makes payments to you in exchange for your home equity.

For many retirees, a reverse mortgage can be a solid option to create extra income. But it isn’t right for everyone. Here’s a rundown of the pros and cons to consider before obtaining a reverse mortgage to help fund your retirement.

Advantages of a reverse mortgage

Obviously, the biggest reason to get a reverse mortgage is for extra retirement income. But there are some other advantages to using a reverse mortgage over other types of borrowing, such as a home equity loan:

Financial flexibility: You can choose to receive money as a fixed monthly payout, as a lump sum, or as a line of credit you can draw from if you need it.Keep your home: Sure, you could sell your house in retirement to access your equity, but then you have to move. With a reverse mortgage, you get to stay in your house for as long as you want. Even if a reverse mortgage results in a bank owning all of the equity in your home, you continue to live there, and don’t owe anything to the bank for as long as you’re alive, unless you decide to sell the home.Tax-friendly income: Payments you receive as a result of a reverse mortgage are not taxable income. In the eyes of the IRS, it is simply a return of money you already have (your home equity).Non-recourse loan: Nearly all reverse mortgages are non-recourse loans (double-check to make sure yours will be), which means that they are only backed by the home itself, not the borrower’s personal assets. No matter how much a borrower receives from a bank and how large the loan balance becomes, the amount due can never be more than the value of the home.

Potential drawbacks to consider

There’s no such thing as a perfect financial product, and reverse mortgages certainly are not an exception. Here are a few things to keep in mind before you consider a reverse mortgage for your retirement:

You lose your equity: The biggest reason to not get a reverse mortgage is that you’ll gradually lose the equity you’ve built in your home, and eventually you might have none at all. You’ll still be able to keep living in your home, but a reverse mortgage might not be the best option if you want to leave your home to your heirs.Lots of fees: Reverse mortgages have relatively high closing fees compared with other types of loans. Plus, when interest rates are high, your equity can start to disappear at a rapid pace.Other home expenses are your responsibility: You’re still responsible for paying property taxes, insurance, and maintenance on your home. If you fall behind on these expenses, the bank could force you to sell.

Is a reverse mortgage right for you?

The bottom line is this: Whether a reverse mortgage is right for you or not depends on your unique situation. For example, if you aren’t worried about leaving your home to your heirs and don’t mind the closing costs, a reverse mortgage can be a great way to build retirement income. On the other hand, if you like having your home equity as a financial safety net and you have other borrowing options, such as a HELOC (home equity line of credit), it might not be the best option.

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