If you’re nearing retirement or have already entered that phase of life, you might be curious about the advantages of a reverse mortgage.
You may be wondering, “Would I benefit from a reverse mortgage?”
Homeowners ages 62 or older with a significant amount of equity in their homes can fund their retirement by taking out a reverse mortgage loan, which converts a portion of their home equity into cash, income, or a line of credit.
Although some people have strong feelings about this type of loan, it’s not universally “good” or “bad.” It just depends on the homeowner’s financial and personal situation.
If you’re a senior homeowner, here are five reasons why a reverse mortgage might be a good idea (plus three scenarios in which it might be better to find an alternative solution).
When is a Reverse Mortgage a Good Idea?
Generally, a reverse mortgage can be beneficial if:
You need extra income.
If your Social Security benefits and other retirement funds aren’t covering your everyday bills, the extra money saved and/or generated by a reverse mortgage could be beneficial.
You want to get rid of monthly mortgage payments.
With a reverse mortgage, you no longer have monthly payments on your home. Instead, you can receive monthly payments to supplement your retirement income. Remember that other expenses won’t be eliminated, including home-related taxes, insurance, and maintenance.
You need to pay for home improvements.
As you grow older, you might need to add new features to your home. For instance, you may need to make your home more handicap accessible. If you need the funds, you can take out a Home Equity Conversion Mortgage (HECM) to pay for the necessary features.
You have medical bills.
The funds from a reverse mortgage aren’t specifically designated for home improvements. If you have medical bills racking up, a line of credit through a reverse mortgage can be used to pay down those debts.
You want to assist your family members with expenses.
In some situations, you might like to help family members with their expenses, such as funding your child’s home purchase or contributing to your grandchild’s education.
When Should a Reverse Mortgage be Avoided?
Generally, a reverse mortgage is probably not a good idea if…
You don’t plan to be in the home very long.
If staying in your home long-term isn’t part of your plan, you might not have adequate time to amortize the costs of the loan.
You plan to use need-based services.
Some reverse mortgages, such as an HECM, will require you to schedule a session with an accredited counselor who will provide more information about the loan. In some cases, the counselor may indicate that a reverse mortgage could impact your eligibility for need-based services such as Medicaid and Supplemental Security Income. Of course, if these are services you’ll rely on, and you would be prevented from doing so by taking out a reverse mortgage, it’s probably best to find an alternative solution.
You aren’t sure if you can make payments on time.
With a reverse mortgage, even though you can eliminate your principal & interest payments, you will still be responsible for paying property taxes, homeowners insurance, and other home-related fees. Missing any of these costs could be considered “maturity events,” which would require you to pay back the entirety of the loan in a shorter time frame.
More to Consider: Using Cash or Equity During Retirement
If you’re still wondering if a reverse mortgage could be right for your scenario, here’s more insight that may be helpful…
After you’re retired, you’ll pay your bills in one of two ways: either by using cash or equity.
Most retired homeowners have used their home as a “savings account,” paying down the principal over the years to create equity.
But, when you’re retired and no longer adding income to your savings accounts, you may run the risk of depleting your cash — leaving you unprepared for unexpected bills that will inevitably pop up during retirement.
This is where a reverse mortgage could come into play.
If you’re still paying a traditional mortgage, you could eliminate your monthly principal and interest payment by switching to a reverse mortgage — allowing you to keep more cash in your savings accounts.
Again, you will either use cash or equity in retirement; regardless, your net worth will stay relatively the same.
If it’s more important for you to have cash readily available for unexpected costs during retirement (such as medical bills, home repairs, etc.), it might be better to use a reverse mortgage, instead of continuing to pay a traditional mortgage each month.
Is a Reverse Mortgage Right for You?
Ultimately, whether a reverse mortgage is a good idea depends on an individual homeowner’s situation and how they intend to use the funds.
Although exploring these scenarios is helpful, it’s best to seek the help of a loan professional when deciding whether you want to pursue a reverse mortgage. A fact-finding interview with a Reverse Mortgage Specialist can help you determine whether a reverse mortgage will work for you by providing an in-depth look at your goals, current income, and financial needs.
At Waterstone Mortgage, it’s our goal to help senior citizens create a more financially stable and secure retirement. So, if there’s a chance a reverse mortgage could benefit you, we’d be happy to help you explore your options.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.
The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage (HECM), and is only available through a Federal Housing Administration (FHA)-approved lender. Not all reverse mortgages are FHA insured. When the loan is due and payable, some or all of the equity in the property that is the subject of the reverse mortgage no longer belongs to borrowers, who may need to sell the home or otherwise repay the loan with interest from other proceeds. A lender may charge an origination fee, mortgage insurance premium, closing costs and servicing fees (added to the balance of the loan). The balance of the loan grows over time and you are charged interest on the balance. Borrowers are responsible for paying property taxes, homeowner’s insurance, maintenance, and related taxes (which may be substantial). There is no escrow account for disbursements of these payments. A set-aside account can be set up to pay taxes and insurance and may be required in some cases. Borrowers must occupy home as their primary residence and pay for ongoing maintenance; otherwise the loan becomes due and payable. The loan also becomes due and payable (and the property may be subject to a tax lien, other encumbrance, or foreclosure) when the last borrower, or eligible non-borrowing surviving spouse, dies, sells the home, permanently moves out, defaults on taxes, insurance payments, or maintenance, or does not otherwise comply with the loan terms. Interest is not tax-deductible until the loan is partially or fully repaid.
