You’ve spent decades paying for your home. It may be the largest asset you own. But in retirement, many homeowners find themselves in an odd spot. The house is worth a lot, while the monthly budget feels tight. Social Security and savings cover the basics, but there’s little room for surprises, for home repairs, or for simply enjoying this stage of life.
If that sounds familiar, you’re not alone, and you haven’t done anything wrong. It’s one of the most common money problems retirees face: wealth tied up in the home, and not enough cash flow month to month.
A reverse mortgage is one tool designed for exactly that problem. It isn’t right for everyone, and it’s often misunderstood. The real question is whether it solves your cash-flow problem better than the alternatives, and whether you can comfortably keep up with what you’re still responsible for. Here’s a clear explanation, so you can judge for yourself.
What a reverse mortgage is
The most common type is the Home Equity Conversion Mortgage, or HECM, which is insured by the Federal Housing Administration (FHA).
A HECM lets homeowners who are age 62 or older turn part of their home equity into cash without selling the home. Unlike a traditional mortgage, there’s no required monthly mortgage payment for as long as you live in the home as your primary residence and keep up with your obligations, which include property taxes, homeowners insurance, HOA dues if any, and basic upkeep.
Instead of paying the lender each month, the loan balance grows over time. The loan is generally repaid when the last borrower sells the home, moves out permanently, or passes away.
How it can help with cash flow
The most useful way to think about a reverse mortgage is as a cash-flow tool, not just a way to get cash.
- Eliminating an existing mortgage payment. If you still have a mortgage, a HECM can pay it off. That monthly mortgage payment goes away, which can change a retirement budget a great deal. You still pay property taxes, insurance, any HOA dues, and upkeep.
- Monthly payments to you. You can receive a set monthly amount for a period of time, or for as long as you live in the home.
- A line of credit. Funds you can draw as needed. With a HECM, the unused portion of the line may grow over time. Your counselor can explain how that works.
- A lump sum, or a combination of these.
What you’re still responsible for
This is the part people most need to understand. You still own your home, and you must:
- Live in it as your primary residence.
- Pay property taxes and homeowners insurance on time.
- Keep the home in reasonable condition.
- Pay any HOA dues or other property charges.
If those obligations aren’t met, the loan can become due. A lender will look at your finances up front to make sure you can keep up with them, and in some cases it may set aside funds for taxes and insurance.
Protections built into the HECM
- Non-recourse. When the home is sold to repay the loan, neither you nor your heirs will generally owe more than the home is worth, even if the balance has grown larger than the home’s value.
- Your heirs have options. They can sell the home, keep it by paying off the loan (often with a regular mortgage), or let the lender handle the sale.
- Protections for a spouse. There are rules that can protect an eligible spouse who isn’t on the loan. This is important to discuss before you apply.
Required counseling, and California’s extra step
Before getting a HECM, you must complete counseling with an independent, HUD-approved reverse mortgage counselor. The counselor isn’t working for the lender. Their job is to make sure you understand the costs, the alternatives, and how the loan affects your finances and your estate.
California adds further protections. Lenders must give you a state worksheet guide to bring to counseling, and there’s a waiting period after counseling before a lender can take your final application. We see these as good things. This decision should never be rushed.
Costs and tradeoffs, honestly
Reverse mortgages can have higher upfront costs than a traditional loan, including FHA mortgage insurance. Because the balance grows, you’ll typically leave less equity to your heirs. And because it’s tied to living in the home, it’s usually best for people who plan to stay. Proceeds can also affect eligibility for some needs-based benefits, so talk with a financial or benefits advisor.
When it tends to make sense, and when it doesn’t
Often worth a look: You plan to stay in the home, you want to remove a mortgage payment or add monthly income, and you can keep up with taxes and insurance.
Often not the best fit: You expect to move soon, you’d struggle with taxes and insurance, or keeping as much equity as possible for heirs is the top priority.
A real example from our clients. A retiree living on Social Security and an annuity wanted a sizable lump sum from her home. Equity wasn’t what stood in her way. Income was. A regular second mortgage would have stretched her budget far too thin, and given her home’s value, a reverse “second” wouldn’t have provided enough. We laid every route side by side using a realistic home value, and asked what the money was really for. That question changed her thinking. If what she needs is monthly breathing room, a reverse mortgage that removes her current payment may serve her better than a lump sum. If she can document a steady payout from her annuity, a standard second could work instead. She avoided a decline and a wasted appraisal, and now she’s choosing between two workable paths, with a short list of documents that will settle it.
Illustrative of one client’s situation. Not a guarantee or commitment to lend. Every file is different.
Qualified Home Loans brokers reverse mortgages through wholesale lenders, including HECMs, proprietary (jumbo) reverse mortgages, and second-lien reverse products, so we can compare programs side by side for you.
A simple plan
- Book a strategy call. Adult children and trusted advisors are welcome to join. We’ll talk about your goals and your budget.
- We review everything up front. Your home, your income, any existing mortgage, and the alternatives, including options that aren’t reverse mortgages.
- We map out the right path. If a reverse mortgage fits, we’ll explain the options and walk you through counseling. If it doesn’t, we’ll tell you.
Want to talk it through?
If you or a parent are wondering whether a reverse mortgage could help, I’m happy to have a calm, no-pressure conversation. Adult children and trusted advisors are welcome to join.
Related: Buying a Home With a Reverse Mortgage · Jumbo and Proprietary Reverse Mortgages
Mike Pacheco
President, Qualified Home Loans
Qualified Home Loans, NMLS 884457 · CA DRE 01910455 · Mike Pacheco, NMLS 236302 · Equal Housing Opportunity · Subject to qualification.