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If you’re a homeowner over age 62, you may be sitting on your biggest financial asset while struggling to pay your bills. With inflation squeezing those with fixed incomes and retirement savings falling short, many wonder how to tap into their home’s equity
without selling the place they love.
Reverse mortgages
can convert your property wealth into tax-free cash without requiring monthly payments. But before you commit to one, it’s important to consider how this decision affects your family’s future. While these loans provide quick financial relief, they could reduce what you’ll leave your children and grandchildren.
Below, industry professionals explain what you should know about reverse mortgages
and how they impact generational wealth.
Find out how a reverse mortgage could benefit you.
How a reverse mortgage affects generational wealth
Unlike a traditional loan, a reverse mortgage doesn’t require you to make monthly payments on what you borrow. Instead, the loan balance grows over time and gets repaid when you sell your home, move out or pass away.
Lisa Moriello, national retail reverse sales manager at loanDepot, says that when used strategically, a reverse mortgage can support generational wealth.
“[It may provide] financial stability, [preserve] other assets and even [enable] proactive gifting to heirs,” Moriello says.
A reverse mortgage can also help protect your family’s wealth in the following ways:
- Preserves other investments: “A reverse mortgage allows [you] to access the equity in your home without depleting other assets,” says Moriello. This means your retirement accounts and investments can continue growing for your heirs.
- Tax-free income: Unlike withdrawals from retirement accounts, reverse mortgage proceeds don’t create taxable events that could reduce your estate value.
- Non-recourse protection: “It’s a misconception that taking out a reverse mortgage places a financial burden on your heirs,” Moriello notes. Heirs aren’t responsible for repayment regardless of the loan balance. They can sell the property, refinance the loan or walk away if the home’s value is less than the loan balance.
But you should also consider these reverse mortgage eligibility requirements and potential drawbacks before taking this route:
- Reduced inheritance value: As interest accrues over time, less equity may remain for heirs when the loan becomes due.
- Eligibility requirements: You must be 62 or older, use the home as your primary residence and have significant equity or own your home.
- Upfront costs: Reverse mortgages typically involve origination fees, mortgage insurance premiums and closing costs that reduce your initial benefit amount.
Compare your reverse mortgage loan options online now.
Who should get a reverse mortgage?
“A reverse mortgage is great [if you have] large equity in [your] home and [a] lower monthly income,” says Dean Rathbun, executive vice president of United American Mortgage Corporation. “It [lets you] live in the home for [your] lifetime without making payments, and still allows heirs to keep the property when [you] pass away.”
But this mortgage type isn’t a one-size-fits-all solution.
“The right mortgage choice always comes down to understanding how it fits within your broader financial plan,” says Moriello.
Before applying, Moriello suggests asking yourself:
- What are you trying to accomplish? “Understanding your financial goals — whether it’s supplementing retirement income, covering healthcare costs or preserving other assets — helps determine if a reverse mortgage is the right fit,” she says.
- How much money do you need and when? Reverse mortgages offer different payout options
: lump sum, monthly payments or a line of credit. Your specific cash flow requirements will determine which structure works best. - How does it compare to alternatives? Consider the costs, qualification requirements and flexibility compared to other options such as home equity loans or downsizing.
Alternatives if a reverse mortgage isn’t right for you
Though reverse mortgages work well for some homeowners, they aren’t the only way to access home equity during retirement.
Here are four alternatives worth considering:
- Home equity line of credit (HELOC): “A HELOC is a great way to [access] principal in a home,” Rathbun points out. Unlike reverse mortgages, many HELOCs offer interest-only payments for the first 10 years. The line of credit also allows you to borrow only what you need while preserving equity for your heirs.
- Home equity loan: This fixed-rate, lump-sum loan option
provides predictable monthly payments. Your heirs benefit because the loan balance decreases over time as you pay off what you borrowed, preserving more of your home’s value. - Cash-out refinance: Consider refinancing if you don’t qualify for a reverse mortgage but have strong credit
and at least 20% home equity. It could provide cash while keeping your home on track to be paid off. This gives heirs the potential to inherit a free-and-clear property. - Sell and downsize: Moving into a smaller, less expensive home can free up equity immediately while reducing ongoing maintenance costs. You can invest the remaining proceeds to generate income while preserving the principal for inheritance.
The bottom line
Reverse mortgages offer a promising way to tap into home equity while aging in place. Their impact on generational wealth depends on your situation, however. That’s why Moriello recommends assessing all your financial options, including retirement savings, investments and other loan products.
Making the right decision starts with research. First, contact at least three reverse mortgage lenders to compare rates, terms and fees. Then, bring these options to a financial advisor who can show how each might affect your estate plan. Finally, include family members in these conversations to ensure they understand your intentions.