Financial planners have long regarded reverse mortgages as an option of last resort for cash-strapped homeowners in retirement. The loans—which let you borrow against the value of your home but don’t require repayment while you’re still living in it—have had a reputation as costly, complex products that put your family at risk of losing your home.
The stigma has lessened lately. Thanks in part to new rules for these government-backed loans, experts such as economics Nobelist Robert Merton have endorsed them, especially as a source of emergency funds. “There’s a totally different way of thinking about these now,” says John Salter, a professor of personal financial planning at Texas Tech University.
Here’s what you need to know about a reverse mortgage.
Your age is a factor. Your loan, formally known as a Home Equity Conversion Mortgage, can amount to about 50% to 70% of your home’s value, depending on your age and other variables. The older you are and the more equity you have in the house, the more you can get. A 70-year-old in a $300,000 house, for example, might be able to borrow about $173,000 before subtracting upfront costs such as a mortgage insurance premium and any balance owed on a preexisting mortgage. (Estimate your borrowing limit at reversemortgage.org.)
You’ll have a safety net. You can take the money as a monthly payment, lump sum, or line of credit to tap as needed. Financial planners say the credit line is usually your best option. You’ll pay a floating rate on the withdrawn money —about the same as for a traditional home-equity line of credit. But unlike the case with a HELOC, your borrowing has no set time limit. Your lender can’t reduce your credit line; in fact, it will grow over time. “Maybe you’ll never use it, but if you have a financial shock or health care crisis, it’s there,” says Salter.
Costs have dropped. While reverse mortgages are more expensive to set up—upwards of $5,000, vs. a few hundred dollars for a HELOC—they have come down in price. In 2013 the initial insurance premium was cut to 0.5% of a home’s value, down from 2.5%, provided you limit your borrowing in year one. That’s a saving of $6,000 on a $300,000 home.
Your spouse is protected. In the past, if only one spouse was listed as a borrower and that spouse either died or moved—say, to a nursing home—the reverse mortgage had to be repaid soon or the other spouse had to move out. A new rule, implemented last June, lets a nonborrowing spouse stay in the home as long as it’s still his or her primary residence. You have to be at least 62 to take out a reverse mortgage, so if your spouse is too young to be a borrower, now he or she can’t be kicked out.
You can still get into trouble. If you fail to pay property taxes or home insurance, you can still lose your home. So if you’re already stretched financially, downsizing might be a better option, says Steven Sass of the Center for Retirement Research.