Is A Reverse Mortgage Right For You?
- Ryan Murray, CFP®
- Mar 18
- 7 min read
Introduction:
Reverse Mortgages are a powerful financial tool that millions of homeowners have used to achieve their goals. However, like any financial product, it should be carefully considered to determine if it's right for you. At Murray Mortgage Solutions, we’ll guide you through every step of the process, ensuring you fully understand how a Reverse Mortgage works, its financial impact, and its risks and benefits.
Definition:
A Reverse Mortgage allows homeowners aged 62 or older to convert part of their home's equity into cash. The proceeds can be used for various needs, offering greater financial flexibility.
Repayment of the loan is not required until the last surviving borrower or eligible non-borrowing spouse passes away, permanently leaves the home, sells the property, or fails to meet loan obligations such as paying property taxes, insurance, and maintaining the home.
The vast majority (over 97%) of Reverse Mortgages are federally insured Home Equity Conversion Mortgages (HECMs). While other types may be available through some states or private lenders, Murray Mortgage Solutions currently offers only federally insured FHA Home Equity Conversion Mortgages (HECM).
This Reverse Mortgage Self Evaluation focuses on the HECM Reverse Mortgage, but may also provide valuable insight for those considering other Reverse Mortgage options.
Reverse Mortgage Self-Evaluation: Questions to Consider
Before proceeding with your Reverse Mortgage loan application, take some time to reflect on these key questions. We will break each question down further along the way.
How do you plan to use the Reverse Mortgage loan proceeds? Reverse Mortgage funds offer flexibility. Many borrowers use these funds for home repairs, supplementing retirement income, managing in-home care costs, or paying off existing mortgage debts.
Do you fully understand your obligations as a Reverse Mortgage borrower? While there are no monthly payments required, it’s crucial to continue paying property taxes, insurance, and maintaining the home. Failure to meet these obligations could result in the loan becoming due.
Will your spouse be a co-borrower? If you're married, you’ll need to determine if your spouse will be a co-borrower. This affects the loan’s terms and the ability to remain in the home if the primary borrower passes away.
How will your Reverse Mortgage be repaid? The loan is repaid when the borrower no longer lives in the home, sells the property, or passes away. The repayment is based on the lesser of the loan balance or the home’s current appraised value.
Do you receive assistance under any government programs? A Reverse Mortgage may impact your eligibility for certain government benefits, such as Medicaid or SSI. Be sure to consult with a financial advisor regarding the effects on your benefits.
How long do you plan to stay in the home? The length of time you plan to stay in your home should be considered, as there are up-front costs with a Reverse Mortgage. Shorter stays may make it less cost-effective.
Have you considered other strategies to supplement your retirement income? It’s important to explore all options for retirement income, including alternative methods of tapping into home equity.
1. How do you intend to use the Reverse Mortgage Loan Proceeds?
A key advantage of a Reverse Mortgage is the flexibility to use the funds however you need. Many homeowners use the loan proceeds for:
Home repairs or modifications
Supplementing retirement income
Managing in-home care costs
Paying off an existing mortgage or bills
Covering property taxes
Delaying Social Security benefits
Creating a financial safety net
Maintaining retirement savings
Purchasing a retirement home
Do you have a plan to make your loan proceeds last?
A successful Reverse Mortgage plan ensures the funds last as long as you want to stay in your home. Recent protections help preserve more home equity in the first year of the loan.
2. Do you fully understand your obligations as a borrower under a Reverse Mortgage Loan?
With a Reverse Mortgage, borrowers do not have to make monthly payments. However, there are important obligations to keep the loan in good standing. If these are not met, the loan could become due and payable.
Since the home is used as collateral, the lender requires that the property remains in good condition and free of liens. Key borrower obligations include:
Residency: You must live in the property for the majority of the year (more than 6 months).
Home Maintenance: You are responsible for maintaining the home’s condition and must ensure it is regularly inspected and appraised.
Taxes & Insurance: You must stay current on property taxes, homeowners insurance, and any other applicable fees, such as HOA dues.
What happens if you can't meet these obligations?
If you fail to pay property taxes, insurance, or HOA fees, the lender may use available loan funds to cover these costs. However, if the loan proceeds are insufficient, the servicer may advance its own funds. If the borrower cannot repay, the loan could go into default, and the servicer may call the loan due.
Financial Assessment:
Since 2015, lenders/brokers must conduct a financial assessment to ensure the borrower can afford ongoing expenses such as taxes and insurance. If financial concerns arise, the lender may set aside funds from the loan to cover these costs in an escrow account. This reduces available loan proceeds but helps ensure you can maintain the property throughout the life of the loan.
Do you understand that failing to meet these obligations can lead to foreclosure? It’s essential to review these responsibilities before proceeding.
3. If you’re married, will your spouse or a co-borrower be on the loan?
For a Home Equity Conversion Mortgage (HECM), both the borrower and the co-borrower must meet specific eligibility criteria. They must be at least 62 years old, listed on the title of the home, and use the home as their primary residence. If your spouse doesn’t meet these requirements, they will be classified as a non-borrowing spouse, either eligible or ineligible, depending on certain conditions.
What if your co-borrower spouse survives you?
If both spouses are borrowers, the reverse mortgage terms apply equally to both. Even if one spouse passes away, the surviving spouse can continue to live in the home under the same conditions.
What if your eligible non-borrowing spouse survives you?
An eligible non-borrowing spouse may remain in the home even after the borrower’s death, deferring repayment of the loan. However, they will not receive any remaining loan proceeds and must continue meeting the loan's obligations.
What if your ineligible non-borrowing spouse survives you?
An ineligible non-borrowing spouse would not have the option to defer repayment, and the loan will be due when the last borrower passes away or leaves the home.
4. How will your Reverse Mortgage loan be repaid?
A Reverse Mortgage is a non-recourse loan, meaning the borrower or their estate will never owe more than the loan balance or the home's current value, whichever is lower. When the loan becomes due, repayment is based on the lesser of the loan balance or 95% of the home’s appraised value.
Do you know your repayment options?
The loan becomes due when the last surviving borrower or eligible non-borrowing spouse passes away, sells the home, or permanently leaves. It can be repaid using proceeds from the sale of the home or personal funds.
How will your heirs repay the loan?
Upon the borrower’s death or permanent departure, the loan can be repaid by:
Selling the property and using the proceeds to pay off the loan
Using personal or gifted funds
Purchasing the property for 95% of its appraised value
Providing the lender with a “deed in lieu of foreclosure” to avoid foreclosure
What about inheriting the home?
Since Reverse Mortgages are non-assumable, heirs cannot take possession of the home until the debt is settled, either by repaying the loan with personal funds, funds from the estate, or obtaining separate mortgage financing.
Can you prepay your loan?
Yes, borrowers can prepay all or part of their loan balance at any time, without any penalty.
5. Do you receive assistance under any government programs that are based on your current income?
A Reverse Mortgage does not affect regular Social Security or Medicare benefits. However, if you receive Medicaid or Supplemental Security Income (SSI), Reverse Mortgage proceeds could potentially impact your eligibility for these benefits.
Although Reverse Mortgage loan advances are not classified as income, they might be considered assets, or “liquid resources,” by means-tested government programs. Any loan funds retained in your bank account may count as assets, affecting eligibility. We recommend consulting with a qualified financial advisor to understand how a Reverse Mortgage might impact your benefits.
Are you considering a lump sum cash draw?
If you choose to take a lump sum from your Reverse Mortgage, and do not immediately spend it, it could impact your eligibility for Medicaid or Supplemental Security Income. Funds left in your bank account could be considered assets and affect your benefits. It's advisable to speak with a financial advisor or a Medicaid expert to understand the implications.
6. How long do you, and your spouse, plan to remain in the home?
Reverse Mortgages involve up-front costs, and these should be carefully considered if you or your spouse do not intend to stay in the home for an extended period. If you plan on moving or selling the home in the near future, it may not be the most cost-effective option. We recommend discussing your situation with a HUD-approved Reverse Mortgage counselor to explore whether there are alternative strategies that better suit your needs.
Are you eligible for public or private benefits available to low-income seniors with Medicare?
During Reverse Mortgage counseling, you may discover opportunities for financial assistance through BenefitsCheckup, which helps identify programs for housing, tax deferral, home repairs, food stamps, and more.
Did you know there are other ways to tap into your home equity?
Homeowners over 62 can also consider alternatives like renting out part of the home, refinancing, using a home equity line of credit, or selling the property. Each option has its own set of advantages and disadvantages that should be carefully reviewed.
Conclusion
A Reverse Mortgage can be a powerful tool to enhance your financial flexibility, but it’s important to understand all aspects before making a decision. At Murray Mortgage Solutions, we guide you through every step, ensuring you fully comprehend how it works and how it can impact your long-term goals.
Ready to find out if a Reverse Mortgage is right for you? Visit our How to Apply page and take the first step toward securing your financial future. After completing the initial application, we'll schedule an in depth review of your options, how the loan works, the estimated fees and whether it's the right choice for you.
