Homegrown Wealth: Why Seniors Are Leveraging Reverse Mortgages for Income

Author: Montecito Capital Management, A Santa Barbara Financial Planner & Financial Advisory Firm

Living costs and medical costs, the fear of outliving one’s savings, are becoming a reality for many retirees. And converting the equity in the home into a source of income has become a popular and flexible strategy for staying in the house and enhancing financial stability.

More than eighty per cent of the population over sixty-five own their home and, with the exception of those who are renting, are free from a traditional mortgage. In the latest edition of the Survey of Consumer Finances, home ownership accounts for more than half of all the wealth of the oldest households, indicating the importance of housing equity as a component of retirement wealth. However, unlike selling or refinancing, a reverse mortgage allows a borrower aged 62 or older to unlock their equity without making any monthly repayments. Repayments are deferred until the property is sold, the owner moves elsewhere, or the borrower dies.

In 2025 the HECM maximum lending limit was raised to $ 1,209,750, which enabled higher priced homes to draw greater equity. That, together with the recent reduction in interest rates, makes it the right time to consider a reverse mortgage. As part of their planning, when needed, with their financial adviser, the over-62s can access the equity in their home without selling or giving up their ownership rights. Nor is it necessary to move or make monthly repayments.

Usually the money from a reverse mortgage is tax-free and may be spent in a fairly diversified manner: it can help to finance living expenses, medical expenses, to modify the dwelling for a life at home (eg building a ramp, improving the security of the bathroom, or even to spend on a trip or a piece of furniture). It also complements the stable income from pensions or alimonies, reducing financial difficulties.

Retired people using a reverse mortgage as an income can reduce withdrawals from their portfolio during a bad time of market fluctuations. This sort of “risk sequence” gives the funds time to recover and helps to safeguard their long-term savings and pension funds.

Home values have appreciated on average from three to four per cent per annum in the United States in the past, with some local areas enjoying much greater gains. Withdrawals from home equity are taken from the equity of the home, but even if a withdrawal is taken, the ownership of the home is retained, so any increase in the value of the real estate is retained, thereby increasing net worth and making room for future financial needs or inheritances.

Age of applicant, value of the building, credit standing, and FHA mortgage ceiling determines the amount of loan. Borrowers of an older age can get a larger loan. To qualify for a HECM, an applicant must be at least 62 years old, own his property outright or owe a modest sum on it, use it as his principal home, keep up the insurance and maintenance of the dwelling, and his taxes must be paid regularly and in time.

HAVING, THE OPTION OF A lump-sum payment for immediate and large expenses, of a revolving credit which grows while unused, of regular installments for the supplementing of income, or of a combination of the foregoing in one loan, borrowers may choose from a variety of combinations to suit their own personal circumstances.

Fidelity estimates the cost of long-term care at $315,000 for couples over the age of 65. A reverse mortgage can help reduce the sequence of returns by providing cash during the downturn and preserving the investment portfolio. It can also help with rising health and long-term care costs. Reverse mortgages are also an inflation hedge, as home prices typically increase by an average of 3-4% annually in a growing economy like California.

Reverse mortgages do have disadvantages. They can reduce the inheritance and the costs are higher than a conventional loan. The borrower must keep up the home, property taxes and insurance or risk foreclosure. The loan also affects the eligibility for need-based government programs such as Medicaid.

Stability is more suitable for the retirees on a fixed income, offering a more stable and predictable access to home equity. Unlike the HELOCI (home equity line of credit) and HECM loans, reverse mortgages do not require a monthly payment or are subject to risk of a lender’s lock.

As the broker had noticed, it turned out that he had thought it through. Important safeguards protect borrowers and heirs from owing more than the home is worth. The mandatory HUD counseling ensures that a spouse has made an informed decision.

Major lenders like Mutual of Omaha dominate the market, which is expected to continue growing because of rising home values, better loan limits, and demographics. In the federal budget year 2025, more than 21,000 HECM loans were approved. Despite the decrease from the 2021 peak, it was the fourth consecutive year in which loan interest rates have gone down.

If used properly, reverse mortgages can unlock the hidden wealth in the home and give the retired a sense of confidence throughout retirement. However, these complex tools require close and careful discussion with your financial and estate planning advisors to determine whether their benefits and risks balance those of other income strategies.