Retirement is a significant milestone representing a well-deserved period of rest after years of hard work. However, it's important to acknowledge that this phase in your life can come with financial constraints. To maintain a comfortable lifestyle during retirement, it's recommended retirees aim for approximately 70% to 90% of their pre-retirement income. Nevertheless, this target income isn't always attainable.
If you find yourself struggling to keep up with monthly mortgage payments after retirement, a reverse mortgage may be worth exploring. Reverse mortgages allow you to supplement your retirement income while being able to stay in your home. Designed specifically for the needs of seniors, reverse mortgage loans can provide a much-needed financial cushion throughout retirement.
The basics of reverse mortgage loans
How does a reverse mortgage work?
In a traditional mortgage, you borrow money from a lender to purchase a home and repay the loan through monthly payments. In a reverse mortgage, it’s just the opposite.
The lender pays the borrower through monthly payments, a lump sum amount, or a line of credit. To qualify for reverse mortgages, homeowners usually need to be at least 62 or older.
Payment to the homeowner is possible because a reverse mortgage is borrowed against the equity in your home, which is the difference between its value and the outstanding mortgage loan balance.
Either the borrower or the borrower’s heirs can pay back a reverse mortgage. To protect reverse mortgage borrowers, lenders are legally obligated to structure reverse mortgages so that the loan amount does not surpass the property's value.
Types of reverse mortgages
There are three types of reverse mortgages offered to qualifying borrowers:
Home Equity Conversion Mortgage: HECM loans are insured by the Federal Housing Administration (FHA) and can be used for any purpose. However, they come loan limits that restrict access to your home’s full range of equity.
Proprietary Reverse Mortgage: This kind of mortgages is most common among homeowners with high property values. Proprietary reverse mortgages are granted through private lenders and allow borrowers to access more of their home’s equity.
Single-Purpose Reverse Mortgage: This kind of mortgage is sponsored by state governments, local governments, or nonprofits. Single purpose mortgages come with restrictions and can only be used for specific purposes, such as home repairs or property taxes.
When do you pay back a reverse mortgage?
Loan repayment on a reverse mortgage is usually triggered when the last borrower or eligible non-borrowing spouse moves out of the house or passes away. If the spouse remains, the loan can continue accruing interest for several years.
An eligible non-borrowing spouse is a spouse who is not a co-borrower but is allowed to stay in the home after the borrower’s passing under the guidelines set by the U.S. Department of Housing and Urban Development (HUD).
However, certain circumstances may require borrowers to pay back reverse mortgages sooner. This could happen if the owner fails to keep up with property taxes, homeowners insurance, or property maintenance.
Can you get out of a reverse mortgage?
There are a few ways you can exit a reverse mortgage. It's important to note that some exit options come with additional expenses, such as closing costs, while others may require lifestyle adjustments, such as relocating.
Reasons for exiting a reverse mortgage
A borrower may want to exit a reverse mortgage for several reasons. Some of the most common are:
- The borrower no longer needs the proceeds from the reverse mortgage to supplement their income, make home repairs, or pay other home expenses.
- The borrower houses someone that may have to leave the home once the borrower passes away.
- The borrower has decided to leave their home to their children and doesn’t want to sell the home.
- The amount provided by the reverse mortgage isn’t enough to stay afloat.
- The borrower needs to move into an assisted living facility.
- The borrower is experiencing buyer’s remorse.
How do you pay back a reverse mortgage?
A reverse mortgage is usually paid back in a single lump sum. This repayment amount accounts for various loan expenses accumulated over time, such as interest fees, closing costs, origination fees, and mortgage insurance premiums. Below are some commonly used methods for repaying the loan balance on a reverse mortgage.
Sell the home
The primary way to repay a reverse mortgage is through the sale of the home. Proceeds from the home sale will cover the loan amount. You’ll never have to repay more than 95% of the home’s appraised value, so it’s not possible to owe more than what the home is worth.
If the home's value exceeds the loan balance, you or your heirs retain the surplus amount. If the home's value is lower than the loan balance, the sale proceeds will be used to repay a portion of the loan, and the remaining difference will be covered by mortgage insurance.
A smooth sale typically takes about 45-60 days. However, it's important to consider that selling a house costs money. Selling your home may be a good option for you if you’re able to cover upfront costs and if your home is worth more than what it was when you took out the reverse mortgage loan.
Refinance the reverse mortgage
Refinancing a reverse mortgage allows you to replace your current loan with a new one that is better suited to your needs. This could mean obtaining a new loan with a lower interest rate, switching from an adjustable rate to a fixed rate, accelerating loan repayment, or gaining access to a higher amount of equity.
It's important to note that refinancing also comes with closing costs. To make sure that the refinancing is worthwhile, the benefits gained from the new terms should outweigh the fees by at least five times.
For example, if refinancing costs the borrower $5,000, it should increase their borrowing capacity by at least $25,000. Refinancing a reverse mortgage loan may be the right choice if your home’s property value has gone up or if interest rates have gone down.
You can refinance a reverse mortgage in one of two ways:
- Switching to a different reverse mortgage in order to pay back the initial reverse mortgage. (Homeowners may want to do this if their home value has risen.)
- Buying out your reverse mortgage with a traditional mortgage. (This method benefits homeowners whose financial situation may have improved and desire to own the home once again.
Use cash or other assets
You can also choose to repay your reverse mortgage with cash or a valuable asset. Borrowers or their heirs could also sell a vehicle, personal possessions, or other property to pay back a reverse mortgage loan.
Additionally, individuals can consider liquidating investments such as stocks, bonds, or mutual funds to pay back the loan. Inheritance funds, whether received or anticipated, can also be utilized. Using cash or other assets may be a good option for you if the money is readily available or if you’re unwilling to let go of the home.
Use an HEI to pay off a reverse mortgage
Taking out a reverse mortgage may seem like a good idea at first, but passing on the responsibility of repayment to your family members, or having to say goodbye to your family home may not be ideal. If you're looking to avoid taking on monthly payments, consider a Home Equity Investment with Point.
An HEI provides borrowers with one lump sum payment with no restrictions as to how the money can be used. In return, Point receives a portion of your home’s future appreciation. You decide when it’s time to exit the agreement, without having to sell your home or pass on the burden of a loan to a loved one.
You could also use a Home Equity Investment to pay back a reverse mortgage. If you’ve already taken a reverse mortgage consider using an HEI to pay it back and regain ownership of your property.
Supplement your income with an HEI after retirement
Accepting that the home you worked so hard to own may no longer be in the family after you’re gone can be difficult. Don’t let go of your property before it’s time. Consider Point’s Home Equity Investment as a way to supplement your income or finance home renovations. Visit Point to find out if you qualify to fund your financial goals without new monthly payments.