The reverse mortgage is a financial option that has been around for decades, but relatively few people ever use them. However, the truth is, many people in their sixties and older end up with a majority of their wealth tied up in their home, while their income shrinks due to retirement.
Enter the reverse mortgage.
Some experts deride reverse mortgages as a financial trap for senior citizens; others herald them as a legitimate planning tool for those in retirement. No matter which camp you end up in, if you’re a homeowner of a certain age, it’s important to ensure that you have all of the facts.
Chances are you’ve seen the commercials touting the benefits of reverse mortgages and wondered if it was the right move for you and your family. Here’s a closer look at some important reverse mortgage facts:
Millennials Need Not Apply
First things first: this is a tool for older Americans. You must be at least 62 years old to qualify for a reverse mortgage.
Also, you must own your home, or at least have a low-enough balance on your traditional mortgage that it can be paid off immediately with the capital you gain from the reverse mortgage payout.
You’ve also got to live in the home. These tools are not available for rental properties, other homes you own, or your former residence if you’ve since moved into assisted living or nursing care.
For the “House Rich, Cash Poor”
If you find yourself looking at the four walls around you and thinking it’s a good thing you have your house paid for, but you could use a little more cash for groceries, then you’re a prime candidate for reverse mortgages.
When you take out a reverse mortgage, you’re basically borrowing your own equity. Unlike a regular mortgage, the balance of your loan isn’t due in monthly installments. Instead, it becomes due when you decide to move or sell your home, or upon death.
Another benefit to getting equity via a reverse mortgage as opposed to selling the home outright is that you maintain ownership of your real estate. The reverse mortgage is essentially a lien against your property. Upon death or when you sell your home, the remaining equity after the reverse mortgage payoff will remain yours, or your heirs.
Be Aware of the Fine Print
Reverse mortgages are complex enough that the federal government actually requires counseling before the loan application is approved. Also make sure that your spouse is on board. If only one spouse is on the reverse mortgage and he or she dies, the surviving spouse could be evicted if unable to pay the balance of the loan.
You probably remember all of the mortgage junk fees and closing costs you had to pay with your traditional home loan — and how they added up so quickly. The bad news is there are even more fees with reverse mortgages that you’ll need to consider before signing on the dotted line.
Also, remember that reverse mortgages don’t cover all of the other costs associated with home ownership, like property and school taxes, utilities and maintenance repairs. As such, the mortgage company may be able to demand immediate repayment of the loan if these associate costs are not paid by the homeowner when due.
Return of the Four-Letter Word
Some people are simply debt-adverse. If you paid off your original mortgage and threw a party to celebrate being debt free, you’ll have to come to terms with the fact that you are, in fact, going back into debt.
If you don’t think the reverse mortgage is going to be right for you, there may be other ways for you generate more income — like taking on a part time job, withdrawing more from your other retirement savings or cutting your budget to free up capital from other line items.
Either way, reverse mortgages are a financial planning tool available to seniors who meet specific criteria. Of course, they aren’t for everyone — and they shouldn’t be entered into without much thought and research. However, they can provide a legitimate monetary benefit to those who find that much of their wealth is tied up in their home.
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Anum Yoon is personal finance blogger who started and maintains Current on Currency.
Photo Credit: ilovebutter
Very helpful information. Thanks for the tips!
Two two conditions would have to be met before I could see where one would be handy.
1. You have no heirs or any worthy cause to leave your home to.
2. You plan to live in the home until death.
IF you think there is ANY chance you’ll move to assisted living/etc, you’d be better off to simply sell…getting ALL the equity possible with the least going to fees, and put that cash in the bank to pay your expenses somewhere else.
As with most ‘financial products’, approach with extreme caution.
I’m not a reverse mortgage expert, but I’ve never heard ANYBODY who didn’t sell them say they were glad they got one. Most people I know put them in the same group as other questionable financial products like payday loans and whole life insurance.