The day has come that you can finally retire, but being without a steady income for the first time in many years might leave you feeling anxious. With an unknown and unpredictable future, many retirees look to options outside Social Security and employer pensions to supplement their income or plan for unforeseen expenses. One strategy some homeowners have turned to is a reverse mortgage, which – like many financial arrangements – has its pros and cons. It’s important to understand exactly what’ involved with a reverse mortgage before you make a life-impacting decision.
What is a reverse mortgage?
A reverse mortgage is a type of loan for homeowners 62 year or older that enables them to convert equity in their property into cash. This financial arrangement is offered by many banks as a way to help retired people with fixed incomes supplement their retirement income. Qualifying applicants can “borrow” from their accumulated equity and get cash to pay for basic living expenses, medical care and other expenses; there are no restrictions on how the funds can be used.
The term “reverse mortgage” refers to the fact that the arrangement is the opposite of a typical home loan: Instead of the bank lending funds that they expect to be re-paid, it gives back the investment that retirees have already applied to their mortgage. And rather than making monthly payments to a lender, the bank pays money to the borrower. The individual is not required to pay back the monthly payments until the home is sold or vacated (presumably by the person’s death). However, he or she must treat the home as a primary residence. In addition, the eligible borrower must pay property taxes, insurance and applicable homeowners association assessments.
How would I benefit from a reverse mortgage?
There are several advantages to executing a reverse mortgage on real estate if you qualify:
- A reverse mortgage can help those on a fixed income handle unexpected expenses.
- The arrangement is useful if one or more borrowers suffers from significant healthcare costs they couldn’t otherwise afford.
- Most reverse mortgages can be paid out with flexible terms, such as a lump sum, monthly payment or line of credit.
- There is a type of reverse mortgage for anyone, including:
- Single Purpose Reverse Mortgage: You’re not limited as to the reason you’re obtaining a reverse mortgage, but all funds must be dedicated to that one purpose.
- Home Equity Conversion Mortgage: The HECM is backed by the Federal Housing Authority, so the fees are less.
- Private Proprietary Mortgage: Borrowers with considerable equity in a high-value home might consider approaching a private lender to handle a reverse mortgage, because they can get more value for their home equity.
Are there reasons I should avoid a reverse mortgage?
There may be reasons to look into options other than a reverse mortgage, depending on your circumstances.
- High Fees: There are costs associated with a reverse mortgage, such as origination and closing fees.
- High Interest Rates: Converting your home’s equity into cash does carry a higher interest rate as compared to a home equity loan, so it’s wise to look at all options.
- Reduction of Estate Value: You are taking equity out of your home with a reverse mortgage, which means there’s less of it to give to heirs.
- Moving & Relocation: The reverse mortgage is predicated on the fact that you’ll stay in the home. If you move, you’ll have to pay back the amount you converted into cash.
A reverse mortgage isn’t for everyone, but for some older homeowners, it provides some financial stability when used in conjunction with Social Security and retirement benefits. There are certain requirements when you’re handling a transaction involving real estate, so you should consult with experts who can help you prepare, execute and notarize the documents. These professionals can also answer any questions you might have about reverse mortgages.