Reverse Mortgage Explained: How It Works and When to Take One - SmartAsset

Retirees are sitting on a record level of home equity, with data showing that their housing wealth has grown $396.1 billion to $10.19 trillion in the third quarter of 2021. For some seniors, this could be an opportunity to supplement their retirement income with a reverse mortgage. But should you seize on this record-breaking moment to take out a loan? Let’s break down how a reverse mortgage works and when it could benefit your retirement.

If you need to boost your retirement income, a financial advisor could help you put together a plan for your goals.

Recent data from the National Reverse Mortgage Lenders Association (NRMLA) and the RiskSpan Reverse Mortgage Market Index shows that senior home equity grew by 4% (or $396.1 billion) in the third quarter of 2021. This adds up to an all-time high of $10.19 trillion.

The research also shows that increases in real estate wealth for homeowners age 62 and older are largely driven by rising home values — an estimated $440 billion increase (3.7%), which is offset by a $44 billion rise in senior-held mortgage debt (2.2%).

And with a record-breaking boost in real estate wealth, Steve Irwin, president of the NRMLA, says that seniors could seize upon the opportunity to supplement their retirement income with a reverse mortgage.

“The wealth that many older homeowners have amassed in their homes, through both paying down a mortgage and home price appreciation, is an important resource for funding longevity,” said Irwin in an interview with SmartAsset. “Reverse mortgages were conceived as a means to help retirees with limited income access the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care.”

Irwin explained that because there are no restrictions on how borrowers could use the money from a reverse mortgage, it gives them the flexibility to pay off existing debts or healthcare while making home improvements, and even “set up a standby line of credit that is accessed only when funds are needed.”

The NRMLA says that more than 1.2 million households have used reverse mortgages as a flexible financial tool to pay for their needs. But Irwin points out that as with any financial product, you should think about it carefully before taking out a reverse mortgage.

How Does a Reverse Mortgage Work?

A reverse mortgage is a home loan that is available to homeowners age 62 and older. When you take a reverse mortgage out, you are borrowing against the value of your primary home. A lender can give you extra income in three ways:

monthly payments
lump sum
line of credit

While borrowers do not have to pay back reverse mortgages on a monthly basis, they will have to pay the loan back when they leave their home, sell it or pass away. Though in the event of dying, the heirs of a homeowner may be able to pay off the loan without selling the home.

Irwin broke down some key points about reverse mortgages:

Before you apply for a reverse mortgage, you must meet with an independent HUD-approved housing counselor who will explain how reverse mortgages work, what alternatives are available and answers key questions.
Reverse mortgage lenders must also assess your finances to ensure that you can afford to live in the property and pay future property taxes and homeowners insurance over the life of the loan.
A reverse mortgage loan is considered in default when a borrower fails to pay his or her property taxes or insurance.
Reverse mortgage lenders will use every available loss mitigation tool available to bring the loan current.
If the borrower doesn’t have the financial resources to bring the loan current, the reverse mortgage could be called due and payable and the borrower forced to sell the property and look for alternative housing options.

When Should You Get a Reverse Mortgage?

While older seniors may be generally eligible for more money, the amount you can get from a reverse mortgage will depend on different factors. The rising market value of your home, for example, could boost the amount that you will get. But rising interest rates could also lower it.

Even though interest rates have been projected to go up in 2022, Irwin says that the NRMLA does not believe that a person should necessarily rush to get a reverse mortgage.

“First and foremost, a reverse mortgage is not for everyone,” he said. “It’s important to consult with family members and trusted advisors about your long-term financial goals and living arrangements to plan for the best possible retirement and to determine whether the strategic use of home equity should be considered.”

And for those who can benefit from a reverse mortgage, Irwin explained that this financial tool is not only useful to tap home equity to fund longevity but should be used as part of a wider strategy in combination with other assets, such as pensions, 401(k) plans and Social Security.

Bottom Line

Senior home equity has reached record levels in 2021 with surging housing values. And homeowners age 62 and older are poised to take advantage of reverse mortgages to boost their retirement income. But borrowers should weigh their options carefully and include family and trusted advisors in the process before taking out a loan.

Tips for Retirement

Rely on an expert. The right financial advisor can help you create a financial plan for your retirement needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Run the numbers now to stay on track. Use SmartAsset’s free retirement calculator to see what you will need in retirement income and if you are on pace to have saved enough.
Make workplace benefits work for you. If you have access to a workplace retirement plan like a 401(k), make sure to take advantage of it. This is often the easiest way to save money for retirement.