Reverse Mortgage vs. Reverse Second Mortgage: Which Strategy Makes More Sense?

For many older homeowners, the question isn't whether they have enough wealth. It's how to turn some of the wealth tied up in their home into financial flexibility without having to sell the home they love.

I recently worked through this question for a family whose 95-year-old mother still lives in her home. Like many seniors, she has substantial equity in her property, but she also has an existing mortgage payment and the normal expenses that come with aging in place.

The family's goal wasn't simply to "get money out of the house."

It was to create a financial safety net that could help Mom continue living comfortably in her home, cover future caregiving or unexpected expenses, and potentially reduce the financial burden on other family members.

We looked at two very different reverse mortgage strategies:

• Replacing the existing mortgage with a traditional HECM reverse mortgage, or
• Keeping the existing mortgage and adding a reverse second mortgage.

The comparison provides a great real-world example of why there isn't necessarily one "best" reverse mortgage.

The Starting Point

For illustration purposes, the homeowner had a property valued at approximately $1.6 million with an existing mortgage balance of roughly $374,000–$380,000.

The existing loan was particularly attractive because its interest rate was approximately 3.25%, with a principal and interest payment of about $1,870 per month.

That created an interesting dilemma.

Do we pay off a great 3.25% mortgage to eliminate the $1,870 monthly payment?

Or do we keep that low-rate mortgage and access the home's equity through a second mortgage instead?

Let's look at both strategies.

Option 1: HECM Reverse Mortgage With a Line of Credit

A Home Equity Conversion Mortgage (HECM) is the FHA-insured reverse mortgage program most people are familiar with.

In this scenario, the HECM would replace the homeowner's existing mortgage.

The approximately $380,000 first mortgage would be paid off, meaning the homeowner would no longer have a required monthly principal and interest mortgage payment.

That alone could free up approximately:

$1,870 per month or $22,440 per year

in household cash flow.

The homeowner would still be responsible for property taxes, homeowners insurance, maintenance, HOA dues if applicable, and complying with the other terms of the reverse mortgage.

Creating an Emergency Reserve

We also modeled taking approximately $50,000 in cash at closing to create an immediate financial cushion.

After paying off the existing mortgage, taking the initial cash and covering estimated closing costs, the initial reverse mortgage balance would be approximately $460,000.

But here's where the HECM gets particularly interesting.

The homeowner would still have approximately $396,000 available through the reverse mortgage line of credit for future needs.

That money doesn't necessarily have to be borrowed immediately.

Instead, it could remain available for things such as:

• Future caregiving expenses
• Major home repairs
• Medical or mobility-related improvements
• Unexpected household expenses
• Supplemental retirement income
• Other financial emergencies

This creates something many families value enormously: options.

The Growing Line of Credit

Another interesting feature of the HECM line of credit is its potential growth over time.

In this particular illustration, the available line of credit was projected to increase from approximately $396,000 initially to about $547,000 by the homeowner's 100th birthday, assuming the loan remained in place and based on the assumptions in the illustration.

That can make the unused line of credit a powerful longevity-planning tool.

Rather than borrowing hundreds of thousands of dollars today and paying interest on all of it, the homeowner can potentially access funds as they are needed.

What's the Downside?

There are tradeoffs.

The existing mortgage has a very attractive estimated rate of 3.25%.

The HECM illustration started at approximately 6% with an adjustable interest rate.

There are also significant upfront costs associated with a HECM, including FHA mortgage insurance. In this example, estimated closing costs were approximately $29,664.

So we're essentially giving up a very inexpensive conventional mortgage and paying higher upfront costs.

What do we receive in exchange?

No required monthly principal and interest mortgage payment and access to a substantial line of credit.

Option 2: Keep the 3.25% Mortgage and Add a Reverse Second Mortgage

The second strategy takes almost the opposite approach.

Instead of paying off the existing mortgage, we leave that 3.25% first mortgage exactly where it is.

We then place a reverse mortgage in second position behind it.

In this illustration, the homeowner could potentially access $400,000 through the reverse second mortgage.

After approximately $8,500 in estimated closing costs, the homeowner would receive roughly:

$391,500 in cash.

That's substantially more immediate cash than under the HECM strategy we modeled.

The Advantages

The most obvious advantage is that we're not giving up the 3.25% first mortgage.

Closing costs are also considerably lower in this illustration:

Approximately $8,500 versus $29,664 with the HECM.

And the family has nearly $400,000 available immediately.

Those funds could potentially be held in conservative, liquid accounts and drawn upon as needed.

But There Are Two Important Tradeoffs

First, unlike the HECM line of credit, the reverse second mortgage requires the homeowner to take the entire amount at closing.

There isn't an unused line of credit sitting there for future access.

Second, the homeowner must continue making the existing $1,870 monthly mortgage payment on the first mortgage.

The reverse second mortgage itself had a fixed rate of 8.99% in this illustration.

Combining the existing first and new second mortgages would result in total mortgage debt of approximately $774,000, with an estimated blended interest rate of approximately 6.02%.

So Which Reverse Mortgage Strategy Is Better?

That's the wrong question.

A better question is:

What problem are we trying to solve?

If the homeowner's primary concern is monthly cash flow, eliminating the existing mortgage payment may be extremely valuable.

The HECM strategy in our example:

• Eliminates the $1,870 monthly mortgage payment
• Starts with a significantly lower total loan balance
• Provides some immediate cash and creates a substantial line of credit for future needs

On the other hand, suppose the family has a reason to want several hundred thousand dollars available immediately and strongly values preserving the existing low-rate mortgage.

The reverse second mortgage may deserve serious consideration.

It:

• Preserves the 3.25% first mortgage
• Has substantially lower upfront costs
• Provides nearly $400,000 in immediate liquidity

But the homeowner continues making the first-mortgage payment and begins with substantially more combined mortgage debt.

Sometimes the Best Financial Decision Isn't Just About the Interest Rate

This is where reverse mortgage planning becomes especially interesting.

Looking strictly at interest rates, giving up a 3.25% mortgage may seem counterintuitive.

But mortgages don't exist in a vacuum.

For a homeowner in their 80s or 90s, monthly cash flow, caregiving needs, liquidity, longevity and quality of life may be far more important than simply maintaining the lowest possible mortgage rate.

The same is true for the family.

Adult children sometimes find themselves contributing toward caregiving, major home repairs or unexpected expenses.

Creating an appropriate financial reserve from the homeowner's own equity can potentially reduce that uncertainty for everyone involved.

And that's one of the reasons I believe reverse mortgages should be viewed as financial planning tools rather than simply mortgage products.

The Goal: More Choices and Less Financial Stress

For this particular family, our discussion ultimately wasn't just about two loans.

It was about Mom.

How can we help her remain comfortable in her home?

How can we make sure money is available if caregiving needs increase?

How can we handle the next unexpected plumbing bill, home repair or major expense without creating a financial emergency?

And how can we give the entire family a little more peace of mind?

Those are the questions I believe should drive a reverse mortgage conversation.

If you or your parents are approaching retirement, or are already well into retirement, and have substantial equity tied up in a home, it may be worth exploring the different ways that equity can be used.

Sometimes the right answer is a traditional HECM.

Sometimes it may be a reverse second mortgage.

And sometimes the best decision is to leave everything exactly as it is.

The important part is understanding your choices before you need the money.

Want to Explore Your Options?

Every homeowner's circumstances are different. Age, home value, existing mortgage balance, interest rates, available equity and long-term goals can dramatically change the numbers.

I can prepare side-by-side scenarios so you and your family can see how the different strategies may affect monthly cash flow, available funds, loan balances and long-term equity before making a decision.