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The Only Guide You'll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments by Tiya Lim, Kevin Grogan, Larry E. Swedroe

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Appendix C. Reverse Mortgages

Retirees are often house rich but cash poor, their homes being their largest assets. There used to be just three significant ways to get equity from a home:

  • Sell it;

  • Rent it;

  • Borrow against it using either a cash-out refinance or a home-equity loan.

Reverse mortgages present a fourth option, allowing homeowners to receive some of the home's equity without moving or making regular loan repayments. Reverse mortgages provide an alternative financing method (though an expensive one) that can help homeowners maintain their independence as well as an adequate standard of living.

People who take out reverse mortgages often:

  • Have a regular need for additional funds;

  • Live on a fixed income with their home equity as their most significant asset;

  • Do not plan to leave their home to their heirs.

Reverse Mortgage Features

Reverse mortgages resemble conventional mortgages in that lenders pay homeowners based on the equity in the home. The biggest difference is that with a reverse mortgage homeowners do not immediately begin paying back the loan. Generally, the loans are not due until the home is no longer the homeowners' principal residence. Money received from reverse mortgages is not taxable and typically does not affect homeowners' other assets or their Medicare or Social Security benefits.

Borrowers can repay reverse mortgages with other assets but typically repay them by selling the home. Any equity remaining after selling the home belongs to the homeowners or their heirs. ...

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