Although many people spend decades planning for retirement, the topic is often a source of anxiety. In fact, a study by the National Institute on Retirement Security found that 56% of Americans are concerned about achieving a financially secure retirement. 

The good news is that many retirees have an asset they may not realize could supplement their retirement income or provide needed liquidity: their home. However, a reverse mortgage isn’t the answer for everyone. Whether this tool makes sense is dependent on a range of individual circumstances and needs. Read on to find out when a reverse mortgage might be a good idea.

Who is eligible for a reverse mortgage?

Before asking if a reverse mortgage is right for you, it’s important to determine that it’s an option. To be eligible, a person must own and have substantial equity in their home. They must also meet the minimum age requirement for their loan. For a Home Equity Conversion Mortgage (HECM), the minimum age is 62. For proprietary reverse mortgages, the minimum age can vary depending on the specific loan terms. Other reverse mortgage eligibility requirements include:

• Living in the home as a primary residence.
• Attending a counseling session with a HUD-approved third-party counselor.
• The ability to: maintain the home, pay home-related charges like property taxes, insurance, and HOA dues, and otherwise uphold the terms of the loan.

When might a reverse mortgage make sense?  

A reverse mortgage offers eligible homeowners a range of advantages that can help target gaps in their retirement planning. For instance, retirees experiencing monthly cash shortages may find the removal of a monthly mortgage payment gives their budget just the breathing room they were looking for. Though borrowers don’t make monthly loan payments, however, they still have financial obligations related to homeownership. The ongoing fulfillment of these obligations is required in their loan terms. These obligations include maintaining the home and continuing to pay property taxes, insurance, and any necessary HOA dues. While the removal of a mortgage payment can offer some relief, homeowners who will struggle to meet these obligations may not be a good fit for a reverse mortgage.

Below are several ways that eligible homeowners have leveraged reverse mortgages to bolster their financial position. Please note that this is not financial or tax advice. Before embarking on any major financial decision, it’s always wise to consult an independent financial advisor.

A cash reserve to hedge against uncertainty

A reverse mortgage line of credit can serve as a reserve fund to use for emergency or big-ticket expenses outside a regular budget. Because a reverse mortgage is a type of loan, any proceeds a borrower takes will not be subject to income tax. Other taxes, including property taxes, will still apply. Because borrowers are not obligated to tap their line of credit, many whose current finances are stable, enjoy peace of mind in knowing that they have a reserve at the ready should they need it in the future.

Sharing wealth

Some people find the pleasure of seeing children and grandchildren benefit from their hard work during their lifetimes a compelling reason to take a reverse mortgage. This choice is only right for people with very secure financial plans who will not have a need for their equity during their lifetimes.

IRA conversion

Converting a traditional IRA into a Roth IRA is attractive for its ability to reduce income-tax liability. However, to make the conversion, you need to make a substantial payment to the IRS to cover the taxes you didn’t pay when you first contributed to the fund. Using funds from a reverse mortgage to make the conversion allows the retiree to benefit from lower income taxes without the need to cash out investments or retirement savings.

When is a reverse mortgage not a good idea?

Though a reverse mortgage can offer a financial cushion to some, there are plenty of circumstances in which they are not a good fit. Even though they allow access to an often-untapped asset, it’s important to use them as part of a complete retirement plan that includes other assets, safeguards, and long-term projections.

A reverse mortgage may also not make sense for those who don’t plan to stay in their home long-term. Because moving from the property automatically ends the loan, people with reverse mortgages who move need to pay back the balance on the loan. For those who know they would like to downsize and want to leverage their equity, a reverse mortgage for purchase is likely a better option.

Deciding if a reverse mortgage is a good idea involves looking at your finances and values from all angles. A qualified financial planner can help you weigh and understand if a reverse mortgage makes sense for your situation and future plans.