Reverse mortgages let homeowners 62+ convert home equity into cash without monthly payments.
Done right, they can fund retirement. Done wrong, they can cost your heirs the home.
What is a reverse mortgage?
Also called HECM (Home Equity Conversion Mortgage), reverse mortgages let you borrow against your home equity without monthly payments.
Key features:
- No monthly mortgage payments
- Loan repaid when you sell, move, or die
- You keep living in the home
- Must be 62+
How it works
Instead of paying the lender, the lender pays you (or gives you a credit line).
Interest accrues on the balance. Loan is repaid when you:
- Sell the home
- Move out permanently (12+ months)
- Pass away
Who qualifies
Age: 62+ (all owners on title must be 62+)
Equity: Significant equity in home (typically 50%+)
Property: Primary residence
Condition: Home must meet HUD standards
Obligations: Must pay property taxes, insurance, and maintenance
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How much can you borrow?
Depends on:
- Your age (older = more)
- Home value
- Current interest rates
- Existing mortgage balance
Example: 70-year-old in CA with $600K home, no mortgage:
- May access ~$300K-$350K (50-58% of value)
Payout options
1. Lump sum: Get all funds at closing
2. Monthly payments: Fixed amount each month for life or set term
3. Line of credit: Draw as needed (unused balance grows over time)
4. Combination: Mix of above
Most retirees choose line of credit for flexibility.
Costs
Origination fee: Up to $6,000
Mortgage insurance: 2% upfront + 0.5% annual
Closing costs: $3K-$5K
Servicing fee: ~$30-35/month
Example $500K home:
- Upfront MIP: $10,000
- Origination: $6,000
- Closing: $4,000
- Total: ~$20K
These costs are financed into the loan.
Interest rates
Fixed rate: Only available with lump-sum option
Adjustable rate: Most common, rates adjust monthly or annually
Rates typically 1-2% higher than traditional mortgages.
When reverse mortgages make sense
Good scenarios:
- Need retirement income
- Want to age in place
- Have significant equity
- Limited other assets
- Don't plan to leave home to heirs
Example: 68-year-old widow with $700K home (paid off), $1,200/month Social Security, struggling with expenses.
Reverse mortgage provides $350K line of credit. She draws $2,000/month, supplements income, stays in home.
When to avoid reverse mortgages
Bad scenarios:
- Plan to move in 3-5 years (costs too high)
- Want to leave home to children
- Can't afford taxes/insurance/maintenance
- Have other less expensive options (HELOC, downsize, etc.)
Myths vs reality
Myth: The bank owns your home.
Reality: You keep title and ownership.
Myth: You can lose your home.
Reality: Only if you don't pay taxes/insurance or maintain property.
Myth: You can owe more than the home is worth.
Reality: HECMs are non-recourse. If balance exceeds value, FHA covers difference.
Myth: Heirs get nothing.
Reality: Heirs can pay off loan and keep home, or sell and keep any equity above loan balance.
Impact on heirs
When you die:
- Heirs have 6-12 months to decide
- Can pay off reverse mortgage and keep home
- Can sell home and keep any remaining equity
- Can walk away if loan exceeds home value (no personal liability)
Example:
- Home worth $800K at death
- Reverse mortgage balance: $500K
- Heirs pay off $500K, keep home (or sell for $800K and keep $300K profit)
Reverse mortgage vs HELOC
| Factor | Reverse Mortgage | HELOC |
|---|---|---|
| Age | 62+ | Any |
| Monthly payment | None | Required |
| Income req | No | Yes |
| Rates | Higher | Lower |
| Costs | High upfront | Lower |
| Repayment | When you move/die | Monthly + balloon |
HELOCs are cheaper if you qualify and can make payments.
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California considerations
High home values: CA reverse mortgages access significant equity (homes often $600K-$1M+)
Property taxes: CA Prop 13 limits tax increases, but you must still pay them
Insurance: CA homeowners insurance can be expensive, especially fire-prone areas
Medi-Cal: Reverse mortgage proceeds don't affect Medi-Cal eligibility if properly structured
Common mistakes
1. Not shopping lenders: Rates and fees vary. Compare 2-3 lenders.
2. Taking lump sum unnecessarily: Line of credit is more flexible and costs less interest.
3. Not planning for taxes/insurance: You must continue paying these or risk foreclosure.
4. Not counseling heirs: Surprise reverse mortgages create family conflict.
5. Using for non-essential expenses: Don't tap equity for vacations. Use for needs.
Alternatives to consider
Downsize: Sell, buy smaller/cheaper home, pocket difference
HELOC: If you can make payments
Refinance: Lower payment with cash-out refi
Sell to family: Family buys home, you rent back
Rental income: Rent out room(s) for income
Bottom line
Reverse mortgages can be powerful retirement tools for seniors with equity, limited income, and desire to age in place.
But they're expensive. Only use if:
- You need the money
- You plan to stay 7-10+ years
- You've exhausted cheaper options
- You understand impact on heirs
Want to explore if a reverse mortgage makes sense? Get A Quote.
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Bill McCoy | 888-421-1117 | mccoy@betteroffers.com