Using a Reverse Mortgage to Pay Off Debt

A reverse mortgage allows homeowners aged 62 and older to tap into their home equity without making monthly payments. And for some, it can be an effective way to pay off medical bills or consolidate high-interest debt.

With a reverse mortgage, you’ll continue to own and live in your home while using the funds to pay down what you owe. Here’s how it can help you consolidate debt and improve your monthly cash flow.

How a reverse mortgage can help pay down debt

If you’re struggling to manage multiple debts or medical expenses on a fixed income, a reverse mortgage can provide financial relief. Here’s how it can help.

Consolidating high-interest debt

Many retirees still carry credit card or personal loan balances with high interest rates. According to the Federal Reserve’s 2023 Report, 39% of individuals aged 60 and older carried a balance on their credit cards. Using a reverse mortgage to pay off any outstanding balances can lower your overall borrowing costs and reduce the number of bills you have to manage each month.

For example, if you’re paying 20% APR on $10,000 in credit card debt, that’s roughly $165 per month in interest charges alone. By tapping into your home equity through a reverse mortgage, you could pay off that balance, eliminate the monthly payment, and free up cash flow for everyday expenses.

Paying off medical bills

Healthcare costs can become a major burden for older adults, especially for those living on a fixed income. Even with Medicare, many retirees face large out-of-pocket expenses for prescriptions, procedures, or long-term care that aren’t fully covered by insurance.

Using a reverse mortgage to pay off or consolidate medical debt can help relieve some of the pressure. It allows you to cover expenses without draining your retirement savings or relying on credit cards. And because reverse mortgage funds aren’t taxed as income, they can provide a flexible way to manage ongoing or unexpected healthcare costs.

Pros of using a reverse mortgage for debt consolidation

There are several benefits to using a reverse mortgage to manage debt:

• No monthly mortgage payment: When you take out a reverse mortgage, you don’t have to make a monthly mortgage payment, freeing up more cash flow for other expenses.
• Access to cash without selling your home: You can stay in your home while using your equity to improve your financial situation.
• Lower borrowing costs: Reverse mortgage interest rates are often lower than credit card or personal loan rates.
• Non-recourse loan: When the home is sold, you and your heirs will never owe more than the home’s value, even if the loan balance exceeds it.
• Flexible disbursement options: You can choose to receive the money as either a lump sum, a monthly payout, or a line of credit.

Cons of using a reverse mortgage for debt consolidation

While a reverse mortgage can help some homeowners manage debt, it isn’t the right fit for everyone. Here are a few key drawbacks to keep in mind:

• Reduced home equity: Borrowing against your equity means you’ll have less available if you want to sell, refinance, or leave the home to your heirs.
• Upfront and ongoing costs: You can expect to pay origination fees, mortgage insurance premiums, and closing costs. These costs can usually be rolled into the loan, but can add up to several thousand dollars.
• Interest accrues over time: Because you aren’t making any mortgage payments, the loan balance continues to grow each month.
• Ongoing responsibilities: You must stay current on property taxes, insurance, and maintenance to keep the loan in good standing.
• Can be confusing: Reverse mortgages can be confusing, so make sure you understand all repayment and inheritance implications before proceeding.

Alternatives to using a reverse mortgage for debt payoff

Before committing to a reverse mortgage, here are some other debt-relief options that could be a better fit:

• Home equity loan or HELOC: A home equity loan or HELOC comes with lower fees and more flexibility than a reverse mortgage. And these two options may also allow you to preserve more of your long-term equity.
• Debt management or credit counseling programs: A certified credit counselor can help you consolidate unsecured debt and negotiate lower interest rates. Since they don’t require you to borrow against your home, you’ll avoid the long-term obligations that come with a reverse mortgage.
• Personal loan: For smaller debts, a personal loan may provide faster access to the funds with fewer fees. Approval is based on your credit and income rather than home equity, and repayment terms are typically fixed.
• Selling or downsizing: Selling your home or moving to a smaller property can unlock your home equity without taking on new debt or interest costs. This approach might appeal to homeowners who no longer need as much space or who want to reduce housing expenses in retirement.

How to get started with a reverse mortgage

If you’re considering using a reverse mortgage to pay down debt, you’ll want to start by meeting with a HUD-approved counselor. This is required for all HECM borrowers and ensures you understand the costs and responsibilities.

It’s also important to compare offers from multiple lenders since the fees, rates, and payout options can vary. From there, you should review all of your loan documents carefully. Make sure you understand how the balance will grow and the terms that trigger repayment.

Finally, you may want to discuss your plans with your family or a trusted financial advisor. Since the loan affects your home equity and estate, it’s important to involve those closest to you.

The bottom line on using a reverse mortgage to pay off debt

A reverse mortgage can help older homeowners pay off medical bills or consolidate high-interest debt, providing much-needed financial breathing room. But it also reduces your home equity and comes with upfront costs that may not make sense for everyone.

If you’re struggling with debt in retirement, weigh all your options carefully. A reverse mortgage could be the right solution, as long as you understand the trade-offs involved.