Reverse Mortgages for Retirement Planning

A Home Equity Conversion Mortgage (HECM) commonly referred to as a reverse mortgage, is essentially the opposite of a traditional mortgage. With a traditional mortgage, you borrow money from a lender and you repay the loan in monthly installments until it is repaid (including interest). With a reverse mortgage, you’re taking a loan on your home and, instead of you paying the lender, the lender pays you. You can receive a lump-sum, a line of credit, fixed monthly payments (ideal for retirement planning) or a combination of the three choices. 

Here’s a quick guide to using a reverse mortgage:

  • You, and your co-owner if you have one, must be age 62 or older in order to qualify for a reverse mortgage. You must pay off any existing mortgages either before or as part of the transaction of acquiring a reverse mortgage.
  • The amount of money you can get depends on several factors including your age, the value of your home, and the current mortgage interest rates.  A good rule of thumb is 50% to 60% of your home’s appraised value. An FHA appraisal is required.
  • Mortgage company takes 100% of the risks. This is one of the key benefits of a reverse mortgage. If, when you die or move out of the home, it is sold for less than the mortgage balance neither you nor your heirs owe anything! Technically, you will pay the FHA Mutual Mortgage Insurance Fund a small premium and they bear the risk! 
  • Unused equity remains with you or your heirs. At death, or when you choose to move out, any sale proceeds after satisfying the mortgage are your (or you heirs). 
  • You make no payments. During the term of the reverse mortgage, you are not required to make any payments. You are required to maintain the home and pay property taxes and homeowners insurance.
  • You have multiple choices for how you can take your money:
    1. Monthly income for life. If you choose to take your money in the form of a monthly income, the income will continue for as long as you remain in the home…even if that’s a really long time! Strategy: Create a guaranteed income for you and your spouse for as long as you live in your home. We find that most people want to live in their home as long as possible. 
    2. Lump sum. If you choose a lump sum, you are free to do whatever you choose with the money. There are no restrictions.
    3. Line of Credit (LOC). If you choose a LOC, your money sits there waiting for you to draw on it. You only pay interest on the money you take out of your LOC.
    4. Combination You can choose a combination of the plans above.
  • Money coming from a reverse mortgage is not subject to income taxes and will not affect your Social Security.
  • When you are no longer living in the home, the mortgage becomes due but you’re allowed ample time to sell. Once sold, the proceeds are used first to pay off the loan and any remaining equity is returned to you or your heirs.
  • Reverse mortgages are governed by the Federal Housing Administration (FHA) and therefore the credit and income qualifications are minimal. They simply want to be certain you can afford to pay homeowner’s insurance premiums and property taxes.

Here’s a tip from Jimbo King, mortgage broker with McGowin-King Mortgage in Birmingham, Alabama: “Interest rates on reverse mortgages are slightly higher than for a conventional mortgage and closing costs are higher as well. If, during the first twelve months, you are willing to take less than 60% of available funds, the FHA will eliminate much of the upfront mortgage insurance which will significantly reduce your closing costs.”

Calculate your possibilities! For a handy calculator to help you estimate your reverse mortgage loan possibilities, visit the Resource Center at; click on ‘Links’; then Reverse Mortgage Loan Calculator.

If you need more cash flow for your retirement and have a strong desire to stay in your home for as long as possible, the reverse mortgage is a strategy you should explore. As with any mortgage loan, you’ll want to shop around for the best pricing.

This article is a modified excerpt of my upcoming book, J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning – Fifth Edition, due out this summer.