Marie was always careful with her finances, but as she got older, she recognized that much of her money was tied up in her home.
“I overheard a friend talk about how happy she was getting approved for a reverse mortgage and was intrigued,” Marie tells Money Talks News. “I hadn’t heard about reverse mortgages before, but my friend’s situation was similar to mine: widowed, with substantial home equity but limited cash flow.”
So, Marie decided to look into a reverse mortgage for herself.
She spoke with her financial advisor, who explained that home equity conversion mortgages (HECMs) — the most common type of reverse mortgage — are federally insured loans designed to help seniors access their home equity without having to make monthly payments.
The fact that reverse mortgages are intended to help seniors remain in their homes as they age was reassuring to Marie.
Her story provides a real-world example of how a reverse mortgage can be a strategic financial tool for staying in a current home or transitioning to a new one.
Here’s how it worked out for Marie, who asked that we use a pseudonym to protect her privacy, as she shared personal and financial information for this article.
What is a HECM reverse mortgage?
A HECM reverse mortgage is a type of loan available to homeowners aged 62 and older that allows them to convert part of their home equity into cash.
Unlike with a traditional mortgage, the homeowner does not repay it monthly. Instead, the loan is repaid when the homeowner sells the home or passes away.
Reverse mortgage borrowers can receive funds in one of three ways — a lump sum, monthly payments or a line of credit — or a combination thereof. The amount a homeowner can borrow depends on their home’s value, their age and current interest rates.
Other requirements also apply.
“Borrowers must pay property taxes, homeowners’ insurance, HOA fees (if any), keep their home in good repair, and use the home as their primary residence,” says Victoria Linton, a reverse mortgage advisor at Mutual of Omaha.
Reverse mortgage terms: A real-world example
Marie bought her Arizona home for $340,000 in 2004. When she started considering a reverse mortgage in 2008, the home’s value had risen to $400,000 due to some renovations and market appreciation.
After attending a federally required counseling session, Marie, then 65, decided to proceed with a reverse mortgage.
Her loan terms allowed her to borrow approximately $160,000. She chose to receive $600 per month for the first six years and later increased it to $800 per month.
In addition to those monthly draws, which helped Marie cover daily living expenses, she occasionally withdrew additional reverse mortgage funds for home improvements that increased the home’s value, including a new HVAC system, landscape irrigation and flooring.
The interest rate at the time was 2.04%. The interest was added to the loan balance rather than Marie having to pay it monthly.
She did not recall the details of her loan fees, but Linton tells Money Talks News that out-of-pocket upfront fees for a reverse mortgage are minimal, typically around $475.
Other costs are financed into the loan. They include:
- Origination fee: A maximum of $6,000, depending on the home value
- Mortgage insurance premium: 2% of the home’s value, plus a monthly amount of 0.5% of the loan balance as of the time of each monthly insurance payment
- Closing costs: Similar to those of other refinance mortgages
What happened when Marie sold her house
Marie’s reverse mortgage remained in good standing since she met the terms.
In 2022, at the peak of the post-pandemic housing market boom, Marie sold her Arizona home for $749,000.
She used part of the proceeds to repay approximately $106,400 on her loan and cover real estate fees and other closing costs, walking away with about $400,000 for herself. (Although Marie’s first reverse mortgage was approved for up to $160,000, she didn’t end up withdrawing more than $106,000, which is why she only had to repay that much.)
She used that money to purchase a small condo in Washington for $319,000, paying in cash. She also spent $16,000 on remodeling projects, including a kitchen refresh and new flooring, lighting and paint for the condo.
Fast-forward a couple of years, though, and Marie’s financial situation had changed. At age 81, she was semi-retired and earning less from part-time work than before. She took out a second HECM reverse mortgage on her Washington condo to avoid withdrawing from her investments.
Her new loan terms allowed her to borrow up to $137,000, with a monthly draw of $1,200 based on an expected lifespan of 92 years.
The interest rate was 7.0%, significantly higher than the rate on her first reverse mortgage, reflecting market conditions. However, she is reassured that should she live beyond 92, she can refinance the loan or sell the property to pay off the loan.
“You can live in your home indefinitely if you meet the loan terms. If rates are low and home values rise, refinancing can make sense,” Linton adds. “Neither the borrower nor their heirs will ever owe more than the home is worth.”
The pros and cons of reverse mortgages
Marie’s experience highlights both the advantages and potential disadvantages of reverse mortgages.
The pros include:
- Reliable cash flow: Monthly payments provide a steady income stream.
- No mortgage payments: Unlike with a traditional mortgage, you don’t have to worry about repaying the loan monthly.
- Preserving retirement assets: If a reverse mortgage enables you to avoid withdrawing from retirement investments, as was the case for Marie, those investments can continue to grow.
- Flexibility: You can refinance if needed and retain ownership of her home.
Cons include:
- Interest rates: The interest rate on her second reverse mortgage was significantly higher.
- Reduced home equity: The loan balance grows over time, which means less proceeds for you when you sell the home or a smaller inheritance for your heirs when you die.
- Fees and other costs: While most reverse mortgage costs can be rolled into the loan, they still add to the total cost of borrowing.
Is a reverse mortgage right for you?
Marie’s story demonstrates how a reverse mortgage can be a useful tool for some retirees. She gained monthly income, funded an out-of-state move and improved her long-term financial stability.
“It gave me options and financial flexibility when needed,” she explains. “Plus, reverse mortgages are designed to help seniors stay in their homes. That was the biggest consideration.”
Although Marie believes the benefits far outweigh the drawbacks in her situation, a reverse mortgage is not the right choice for everyone.
Whether the pros would outweigh the cons for you depends on the particulars of your financial situation.
“If you’re thinking about a reverse mortgage, discuss your situation with someone knowledgeable,” Marie advises. “Talk to a financial professional, make sure you understand the terms, and select your loan company carefully.”
For Marie, leveraging a reverse mortgage twice was a winning strategy, but only because she did her homework, weighed the risks and made decisions that reinforced her financial goals.
Add a Comment