The federally-insured Home Equity Conversion Mortgage (HECM) program allows homeowners aged 62 and older to tap into their home’s equity through a non-recourse loan.
Reverse mortgages aren’t for everyone, but for some people, there are many reasons why it’s a great financial tool to consider.
Top 10 reasons people choose to get a reverse mortgage:
1. Budget breathing room/peace of mind
Older adults live on fixed incomes once they retire. They also generally have fixed expenses, whether mortgage payments, monthly utility bills, or property-related expenses. Sometimes, they may experience unexpected expenses like medical bills or a costly home improvement.
A reverse mortgage can free up your monthly budget by eliminating your mortgage payment and giving you extra breathing room. With a reverse mortgage line of credit, you can gain peace of mind for future expenses such as new medication or replacing your water heater.
2. Enhance lifestyle
Reverse mortgage proceeds don’t have to be used to pay for your necessities. You can use the loan however you see fit—perhaps for dining out or vacationing. Rather than limiting yourself to a shoestring budget, a reverse mortgage can help give you some flexibility to let you enjoy your golden years.
3. Home improvement or modifications for aging-in-place
People take out a reverse mortgage because they want to remain in their homes for as long as possible. Sometimes to do that, though, it’s necessary to make some adjustments.
You can use a reverse mortgage to help modify your home for aging in place. That could include installing a ramp or placing grab bars in strategic locations such as bathrooms and hallways.
4. Debt consolidation
One requirement of the HECM program is that it must take a “first lien” position on your home. If you have an existing “forward” mortgage, part of your reverse mortgage proceeds will go toward paying it off.
You may also have other outstanding loans, such as a car or credit card debt. With a reverse mortgage, you can consolidate your debt and pay off high-interest-rate loans, making the HECM your only outstanding loan.
5. Purchase a new home
In addition to the standard HECM loan, a purchase program allows borrowers to buy a home and take out a reverse mortgage in one transaction.
This can help save time and money and can be something to look into if you’re interested in downsizing, transitioning to a single-level home, or moving closer to family or a climate of your choice.
6. Fund gifts to heirs
As mentioned, reverse mortgage proceeds don’t have to be used to pay bills. You can also use that money to give gifts to your loved ones or heirs, whether giving them enough money to make a down payment on a home or even helping a grandchild pay for college.
7. Purchase a second home with no mortgage payment—including RVs
If you’re considering buying a second home or even an RV purchase but want to avoid getting a mortgage or a loan, taking out a reverse mortgage on your primary residence could help you accomplish your objective.
While HECM borrowers must maintain the home with the reverse mortgage as their primary residence, you can still have a vacation home or travel around in an RV if you are gone for less than six months each year.
8. Utilize the credit line growth rate to hedge against inflation
If you don’t have an immediate need for your reverse mortgage proceeds, you may wish to access your loan through a line of credit. Beyond the flexibility in drawing down your loan as needed, the line of credit option has another benefit: the unused portion grows at the interest rate of +.50%.
That means if your loan has a 6% interest rate, the unused portion of your line of credit will grow by 6.5%. This feature also serves as a hedge against inflation. If the interest rate increases, so does your available funds growth. So, if interest rose to 8%, your remaining line of credit funds would grow by 8.5%. (More about the credit line & growth feature)
9. Fund long-term care
Sometimes older adults see their expenses mount rapidly as their health deteriorates. In some cases, paying for an in-home caregiver can be more affordable than moving into a costlier nursing home or assisted living setting.
One way to pay for long-term care that you’re receiving in your home is through a reverse mortgage.
10. Fund life insurance
You can use your reverse mortgage proceeds to fund a life insurance product to leave to your heirs.
A life insurance policy has an added benefit in that you’ll know the exact sum left to your estate.