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Financial Planning

What your clients need to know about reverse mortgages

Clients approaching retirement age who own their own home may at some point have questions about reverse mortgages. 

While a reverse mortgage can be a viable option in some cases, it’s important to explain to your clients how they work. You’ll also want to highlight the pros and cons.

Reverse mortgage basics to share with your clients

Make sure your clients understand that a reverse mortgage is a type of home equity loan. The most common, a Home Equity Conversion Mortgage (HECM), is government-run.

With a reverse mortgage, your clients will borrow against the value of their home and the lender pays out funds. These funds are most commonly paid out as:

  • A lump sum where your client gets the full amount of the loan in one payment.
  • A line of credit where your client can take out funds when needed, up to the loan amount.
  • Fixed monthly payments where your client will get a set amount each month as income.

Depending on your clients’ needs, one type of payment might make more sense, especially as they approach retirement.

It’s also important to highlight some of the differences between a reverse mortgage and other home equity loans, especially when it comes to repayment. While your clients won’t owe a monthly payment with a reverse mortgage, they should know that if they sell or permanently move out of their home, the full balance of the loan is due.

Helping Your Clients Determine If a Reverse Mortgage Is Right for Them

A reverse mortgage is not right for everyone, so make sure you give your clients the full picture before they jump into the process. First, make sure they understand the basic requirements for a reverse mortgage:

  • Your clients are over 62.
  • Your clients own their home as a primary residence or are close to paying off the current mortgage. Otherwise, any existing mortgage gets paid using proceeds from the loan.
  • Your clients need to have income available to keep up with associated and related home expenses, and they must keep their home in good working condition.

It’s also critical to communicate that over the life of the loan, the debt will increase and the home’s equity will decrease. Finally, if your clients are already struggling with cash flow needs, help them examine their overall budget, common costs and expenses, including what they need to know about Social Security.

Clients need to understand that they should also plan for increased healthcare costs and medical emergencies in their budget, too. This is important because if they’re hit with unexpected costs and default on the loan, the bank can foreclose.

The pros and cons of reverse mortgages

You’ll also want to discuss some of the pros and cons of reverse mortgages with your clients.

Pros:

  • If your client’s home is their biggest asset, and they have limited ways to get cash, a reverse mortgage can help them avoid tapping into their retirement savings.
  • A reverse mortgage can help your clients remain in their home – as long as they keep up with expenses. It can also be used as a tool for home improvement, as well as a way to pay down other large expenses, including medical bills.
  • Finally, unlike many other loans, borrowers don’t have to pay their loan balances monthly, which can help potentially remove additional expenses.

Cons:

  • The flip side of a reverse mortgage for your clients is that this loan can make it more difficult to pass down the home as an asset to their heirs. That’s especially true if the loan ends up exceeding the home’s value.
  • It’s also important to consider costs and fees. A large portion of the equity gained in the home could end up being spent on fees, closing costs and interest.
  • Finally, for some clients, a reverse mortgage isn’t the best long-term solution to their financial needs.

Alternatives to reverse mortgages

There are a few alternatives you can discuss with your clients, including home equity loans, a home equity line of credit or a personal loan. Once your clients have all of the information, you can work with them to help determine what the best option is for both their long and short-term needs moving forward.

Read more about what your clients should know about costs and expenses in retirement.

 

SM.1427657.11.19

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