Are Reverse Mortgages Good or Bad? | Adviser Investments

Reverse Mortgages—Can They Be Used for Good?

Reverse mortgages have a bad reputation—and not without reason. Tapping into your home’s equity to cover expenses may mean the home will need to be sold by your heirs to repay the loan. It’s not a step to be taken lightly, and for many retirees, it’s not one to be taken at all if they have other assets to draw upon.

But there are some circumstances in which even high-net-worth homeowners may benefit from a reverse mortgage. We’ll explain them below, but first, let’s define our terms: A reverse mortgage is a loan that allows you to access a portion of the equity in your home. Proceeds can be taken as a lump sum, doled out in the form of fixed monthly payments or held in reserve as a line of credit. Unlike most loans, you don’t pay a reverse back month by month. Instead, your loan is repaid down the road with proceeds from the sale of your home or your estate.

Most reverse mortgages are taken out under a federal program that protects homeowners from foreclosure if their home’s value declines. To qualify, you must be at least 62 years of age and have a large amount of equity in your home. Loan amounts are capped at $970,800 in 2022 for federally backed reverse mortgages.

If your home’s equity value exceeds that limit, you may qualify for a private, or “jumbo,” reverse. Jumbo reverses can unlock up to $4 million in home equity, and they may be available to homeowners as young as 55—but they come with steeper fees and fewer protections than federally backed reverses.

What advantages does a reverse have over the alternatives?

  • Unlike a home equity line of credit, you don’t need to repay the loan during your lifetime
  • Unlike distributions from your retirement funds or other investment accounts, reverse mortgage proceeds are tax-free

For example, a person who wants to age in place but needs to hire home health aides or make alterations to their property to do so may benefit from using a reverse to cover the costs—lowering their tax burden during their lifetime and allowing their investment portfolio to continue to grow. A reverse can also be used to pay off an existing mortgage, reducing your fixed monthly expenses during retirement.

Reverses may also offer arbitrage advantages in a rising-interest-rate environment. The total amount of equity you’re eligible to tap into will be determined when you apply to take out a reverse. Any portion of that amount that you don’t need right away will be available as a line of credit. Take out the reverse when rates are low and your available line of credit will increase as interest rates do, helping to provide an inflation buffer. (Note: Timing is crucial here.)

Two questions must be answered before taking out a reverse: Are you certain you want to stay in your home? And are you sure your heirs will not? Selling your home (or simply ceasing to use it as your principal residence) may trigger the repayment of the reverse mortgage. And if your heirs want to keep the property in the family when you pass, they’ll need to repay the funds from the other proceeds of your estate.

Reverse mortgages make sense in certain situations and are the wrong choice in many others. Call us before attempting to use this strategy—after all, we are The Planner You Can Talk To.

About Adviser Investments

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