The federally-insured Home Equity Conversion Mortgage (HECM) program allows homeowners aged 62 and older to tap into their home’s equity in the form of a non-recourse loan.
Reverse mortgages aren’t for everyone, but for some people, there are a whole lot of reasons why it’s a great financial tool to consider.
Here are the top 10:
1. Budget Breathing Room / Peace of Mind
Older adults live on fixed incomes once they retire. They also generally have fixed expenses, whether it’s a mortgage payment, monthly utility bills, or property-related expenses. Sometimes, though, 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 some extra breathing room. With a reverse mortgage line of credit, you could even gain peace of mind for future expenses such as new medication or needing to replace your hot water heater.
2. Enhance Lifestyle
Reverse mortgage proceeds don’t just have to be used to pay for your necessities. You can use the loan however you see fit—perhaps for dining out or taking a vacation.
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
One big reason people take out a reverse mortgage is because they want to remain in their homes for as long as possible. Sometimes in order to do that, though, it’s necessary to make some adjustments.
You can use a reverse mortgage to help pay for modifying 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. That means if you have an existing “forward” mortgage, part of your reverse mortgage proceeds would go toward paying it off.
You may have other outstanding loans, as well, such as a car loan 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. New Home Purchase
In addition to the standard HECM loan, there is also a Purchase program, which 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 we’ve mentioned, reverse mortgage proceeds don’t just have to be used to pay bills. You can also use that money to give gifts to your loved ones or heirs, whether it’s 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 thinking about buying a second home or even an RV, but don’t want to have to get a mortgage or a loan to do so, taking out a reverse mortgage on your primary residence could help you accomplish your objective.
While HECM borrowers are required to maintain the home with the reverse mortgage as their primary residence, you are still able to have a vacation home, or travel around in an RV, as long as you are gone for less than six months out of 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 being able to draw down your loan as needed, the line of credit option has another benefit: the unused portion actually grows at the rate of interest +1.25%.
That means if your loan has a 3% interest rate, then the unused portion of your line of credit would grow by 4.25%. This feature also serves as a hedge against inflation: if the interest rate increases, so does the growth of your available funds. So, if interest rose to 4%, then your remaining line of credit funds would grow by 5.25%. (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, it can be more affordable to pay for an in-home caregiver rather than move 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 that will be left to your estate.
ARLO recommends these helpful resources: