Depending on who you ask, a reverse mortgage is either an expensive loan that ultimately costs you or a great way to help fund your retirement. If the loan allows you to maintain your lifestyle without blowing through your savings, it could be a financially sound decision. A reverse mortgage is typically viewed as the last major loan you’ll need in your lifetime.
So, if the amount that you’ll receive won’t be enough to make more than a dent in your debts, you should look into other options before signing up a for a fresh loan.
What Is A Reverse Mortgage?
A reverse mortgage is a loan available for people who are 62 or older. Applying for a reverse mortgage, the loan size is based on your equity in your home. Instead of making monthly mortgage payments, your lender pays you. You’re not responsible for making payments as long as you continue to live in the home. As time passes, the loan swells with interest and your equity decreases.
Eventually, the loan has to be repaid. Payments are due once you sell your home or pass away. That means that your heirs won’t be able to keep the property unless they’re able to pay off the loan in full when you die.
Who Can Qualify?
You must be at least 62 years old to qualify for a reverse mortgage and your home must be completely or nearly paid off. It also needs to be your primary residence. You can’t get a reverse mortgage on your rental property.
Not everyone who qualifies for a reverse mortgage should get one. If you can manage your expenses without saddling your estate without an extra debt, that’s definitely a better strategy. The loan isn’t the best option for everyone who’s struggling for money either. The ARLO pros and cons section notes that: “For a lot of folks, the reverse mortgage makes a lot of sense and when it works it works well. For others, even the benefits of a reverse mortgage will not sufficiently improve their circumstances enough to where the loan makes sense for them.”
There are certain groups of seniors who fall into the sweet spot for reverse mortgages. They are:
People Who Are Done Moving
Don’t take out a reverse mortgage unless you’re planning to stay in your home for a while. Once you move you’ll have to repay the loan, which might stress your finances more than they can bear. Additionally, the closing costs for a reverse mortgage are extremely high. It’s a lot of money to pay for a home that you’re going to move out of in a year.
People Who Don’t Want To Leave Their Home To Anyone
Maybe your kids are thriving financially and don’t need to inherit your home. Maybe you’re childless. There are many reasons you might decide not to leave your home to anyone. It’s your choice. You’re not obligated to do anything. Leaving your home to an heir is as valid as deciding to cash in on your equity.
When you die or move out of the house, you have to pay back your loan. Typically, this is done by selling the house. If your heirs want to keep the home for themselves, they have to pay the loan balance to the lender. If they can’t come up with the cash, your home will be sold and the lender will recover the money that was advanced to you.
You’re not responsible for a shortfall if the lender sells your house for less than the loan amount. If the home sells for a greater amount, your estate keeps the proceeds.
People Who Can Afford It
Reverse mortgages come with hefty fees. In addition to the costs associated with the loan itself, which can be rolled into the total amount, you have to be able to keep up with maintenance costs. You may not have a mortgage bill but you’re still responsible for the property taxes and any homeowner’s association fees.
If you skip these payments, your lender can demand that you repay the loan immediately.
Is A Reverse Mortgage The Right Choice For You?
You need to finance your retirement somehow. If your investments aren’t enough to pay the bills, a reverse mortgage could make sense. However, it’s not for everyone. You need to be a senior homeowner who owes almost nothing on their home and has no federal debt. Speak to a financial planner to discuss your options.