Should You Use a Reverse Mortgage to Fund Your Retirement? Here’s When It Makes Sense

Seniors approaching retirement (ideally) have a few sources of income to draw on, including Social Security and distributions from their investment accounts. But what if that’s not enough? Some older Americans may want to consider one of their largest assets: their house.

Enter reverse mortgages, which allow homeowners to borrow against their home instead of borrowing from a lender to pay for their home. With older homeowners holding record amounts of home equity, reverse mortgages could help more retirees cover day-to-day living expenses, steep medical bills or home renovations. But they are still a relatively niche product, and they won’t fit into everyone’s retirement plan.

“It’s not a one-size-fits-all or one-size-fits-most,” says Don Graves, president and founder of the Housing Wealth Institute and an adjunct instructor of retirement income at The American College of Financial Services. For the right homeowner, though, a reverse mortgage can be the path to affording the retirement you want while staying in your home.

So when is a reverse mortgage a smart strategy to increase cash flow in retirement? Here’s when it may make sense for you.

You’re the right age

To qualify for a reverse mortgage, you typically need to be at least 62 years old — and the older you are, the more you may be able to borrow. Your age plays a significant role in determining the amount of money you can receive, known as the “principal limit.” Since this limit considers how long the loan is expected to last, being older means you can access more cash.

If you plan to include a spouse or co-borrower on your reverse mortgage application, keep in mind that the age of the youngest borrower will be used to set the principal limit.

For those who aren't yet 62, there may be other options. The Home Equity Conversion Mortgage, or HECM, is backed by the Federal Housing Administration, which sets the minimum age. While the HECM is the most popular type of reverse mortgage, some lenders offer proprietary reverse mortgages with lower age minimums, typically 55 years old.

You have a substantial amount of home equity and need to supplement retirement income

If you own your home outright and find Social Security isn’t enough to meet your needs, a reverse mortgage may be a good way to make ends meet, says John Gugle, financial advisor and founder of Gugle Wealth Advisory.

“You’re tapping into your home’s equity to help you pay the bills, feed yourself and maybe take a trip here and there,” Gugle says.

Even if you are still paying off your home, a reverse mortgage can be a smart move if you have considerable equity. The exact amount of equity you need in your home will vary from one lender to another. While the general rule of thumb is that you need to have at least 50% equity to qualify, the more equity you have in your home, the better pricing you’ll probably see from a lender. A reverse mortgage lets you unlock that equity and use it however you wish, everything from gas and groceries to healthcare expenses.

These products can also be worth exploring if you do have retirement savings but you want to put off using them. That could happen if, for example, the price of financial assets like stocks just dropped significantly and you don’t want to sell at a loss.

“A reverse mortgage could be a strategic tool that would allow you to avoid withdrawing from retirement savings during a market downturn,” Gugle says. “You could tap into [your home equity] to cover your bills without having to liquidate an investment portfolio at an inopportune time.”

You want to stay in your home long-term

Like other home loans, reverse mortgages have upfront costs, including origination fees, closing costs and an initial mortgage insurance premium. If you move soon after taking out a reverse mortgage, you might not have enough time to recoup that money.

Graves says if a client told him they were planning to move in three years, he’d advise them against a reverse mortgage. But if you’re part of the 88% of Americans who say they want to age in place, it’s smart to consider whether a reverse mortgage can make that possible.

“It’s designed to be a longer-deal proposition,” Graves adds. “Ideally, for your forever home.”

You want to get rid of your monthly mortgage payment

Monthly mortgage payments can take a huge bite out of your wallet: The median payments are about $2,800 — just shy of the all-time record, according to a recent report from real estate company Redfin. Ditching those payments could result in some serious relief for your budget.

If you have a lot of equity built up but still have mortgage payments to make, a reverse mortgage can be a fix. That’s because reverse mortgages have a unique design where you’re not required to make any payments on the loan until you move or die (as long as you keep current with property taxes, insurance and home maintenance). So you can borrow to pay off an existing mortgage without adding a new bill – thereby freeing up monthly cash flow. For people who are about to lose out on the income they rely on for their monthly payments, such as those who experience a layoff or retire, a reverse mortgage can especially make sense, Gugle says.

“It gives you some flexibility,” he adds.

You’ve considered all the pros and cons

A reverse mortgage can be a powerful tool, but like most financial products, they come with risks that need to be carefully considered. There are those upfront costs previously mentioned. Most notably: As with a traditional mortgage, there is the risk of foreclosure. This can happen if you can’t keep up with payments on things like property taxes or homeowners insurance or stop using the home as a primary residence.

If you have other people living in your home, be aware that they may have to move out when you die if they weren’t included in the initial loan agreement — though there are some protections for non-borrowing spouses.

In a similar vein, you may have less to leave your heirs. If you do have a reverse mortgage, your heirs will have to either come up with the money to pay back the loan or sell the home. If leaving your home without any conditions is a priority, you may want to consider other options.

Finally, while the proceeds from a reverse mortgage will not affect your Social Security benefits, it can potentially affect other government benefits — like Medicaid or Supplemental Security Income — that are based on your income or assets. A reverse mortgage is counted as a loan, so it isn’t considered income, but unspent reverse mortgage funds can be counted against the asset limit for these government programs.

More from Money:

How a 'Blended Income' Strategy Can Boost Your Retirement Cash Flow

Will You Need Long-Term Care? Here's What the Statistics Say

6 Ways to Get More Money in Retirement