Reverse mortgages offer homeowners, aged 62 and over, the promise of extracting the equity from their homes while enjoying the benefit of continuing to live in their homes. It’s an attractive offer that often appears too good to be true. But in the right circumstances, it is the perfect tool to supplement less than robust retirement incomes, to accomplish specific financial goals, or simply to allow for a little additional living in your golden years – while remaining in your home.
Before you dive right in, though, there are a few things you need to know about reverse mortgages so you can make the right decision for your needs today – and over time. These are some of the important things you must understand before embracing a reverse mortgage for your retirement living.
Types of Reverse Mortgages
There are essentially three different types of reverse mortgages available to qualifying homeowners today. Each one offers unique strengths and weaknesses to consider. One may be better for you than the other options. The more you know about the different reverse mortgage options, the wiser choices you can make along the way.
- Home Equity Conversion Mortgage (HECM)
- Proprietary Reverse Mortgage
- Single-Purpose Reverse Mortgage
The most common reverse mortgage is the HECM. In fact, you may see this term used, interchangeably with the term “reverse mortgage” quite often. While not all reverse mortgages are HECMs, all HECMs are reverse mortgages. Some consider a HECM to purchase a different type of reverse mortgage in its own right, but it remains a HECM.
Why Consider a Reverse Mortgage?
People consider reverse mortgages for various reasons. Some need additional retirement funds to maintain their preferred lifestyles. Other people are living longer, and maintaining independence, longer than they anticipated, the proceeds from a reverse mortgage help them stretch their retirement funds further.
Some people have saved their entire lives and want to splurge a little in retirement, the proceeds from a reverse mortgage allow them to enjoy some of the extras. Then, others have faced and recovered from unexpected illnesses, leaving behind extensive medical bills they prefer to pay early on.
It doesn’t matter why. Every person has a unique reason for considering a reverse mortgage. Regardless of the reason, reverse mortgages allow qualifying individuals, over the age of 62 to put money in their hands to fund lifestyles, prolong independence, offer financial security, and more.
At first glance, many people are ready to dive right in and cash out the equity in their homes through a reverse mortgage, especially considering that you do not need to take on additional monthly bills to make it happen. Before you saddle up, though, there are a few things to consider. Plus, you should always read the fine print before you choose to put your home on the line.
How do Reverse Mortgages Work?
With a traditional mortgage, you borrow money from a lender and then repay the mortgage each month. What makes a reverse mortgage different, is that it allows qualifying homeowners to take out an advanced payment on a portion of the equity they have in your home. In most cases, you do not need to repay the money for as long as you continue living in your home.
The idea is that when you move out of your home or pass away, you, your spouse, or your estate will repay the loan. In some instances, the home must be sold to repay the loan. This is one of the kickers that make many people step away from the idea of a reverse mortgage. But it’s not the only potential deterrent.
Reading the fine print is important when considering reverse mortgages. For instance, you remain responsible for maintaining insurance and paying property taxes on the home. Additionally, depending on the type of reverse mortgage you get, you may be able to choose between one lump sum payment or equal monthly payments spread out over time, though you may be subject to “set aside” payments, where the lender withholds money to cover the costs of home insurance, property taxes, etc.
Benefits of Reverse Mortgages
One of the largest benefits people often neglect to mention when it comes to reverse mortgage is that, in most cases, the proceeds from these mortgages are not taxable. Further, they do not usually affect your ability to receive Social Security Benefits or Medicare.
The other benefit is money. Whether you secure a lump sum payment or one of the many monthly payment options, the proceeds from your reverse mortgage can help you fund your retirement goals or simply stretch an insufficient retirement to meet your current needs.
Considerations Before Accepting Reverse Mortgages
There are plenty of benefits that make reverse mortgages attractive. But there are a few drawbacks to keep in mind. These drawbacks may not be enough to tip the scales for some borrowers. However, some people have future plans for their homes that may be jeopardized by the reverse mortgage process.
- Associated fees. Like any mortgage, there are fees to consider with a reverse mortgage, such as closing costs, loan origination fees, and service fees.
- Mortgage insurance premiums. Federally-insured HECMs also charge mortgage insurance premiums to borrowers, which may be substantial, depending on the home’s value. It’s wise to calculate those costs compared to the amount you’ll receive from the loan.
- They still charge interest. The interest adds up over time. The longer you continue to live in your home, the more it will cost to repay the mortgage once you move out.
- Variable or adjustable mortgage rates. While mortgage rates are currently at an all-time low, that’s not likely to stand. Since most reverse mortgages are adjustable rate mortgages, this can prove problematic for your family once you move out.
- Fixed-rate mortgage options. Among lenders that do offer fixed-rate reverse mortgages, typically HECMs, the amount you can borrow is greatly reduced when compared to the amount you can borrow with adjustable-rate mortgage loans.
- Interest is not deductible. The interest rates for your reverse mortgage are not tax-deductible – until you begin repaying the loan.
Another consideration is the amount of time you intend to continue living in your home. If you anticipate the need for managed care in a long-term care facility or a need to move to a different home or city within the next five years, this might not be a cost-effective solution to meet your needs.
Is a Reverse Mortgage Right for You?
This is what it all boils down to for most people. Only you can determine if a reverse mortgage is the right decision in your unique circumstances. There are a few signs that this might be a sound financial move for you to make, however, such as any of the following:
- A reverse mortgage offers a complete solution for a long-term financial problem. For instance, if you need to purchase a new car that will likely take you throughout your retirement, this is a possible solution that allows you to get the reliable transportation you need that will last several years – especially with so many carmakers offering extended warranties on reliable new cars.
- You have no intention of moving. The upfront costs on reverse mortgages can be substantial. If you’re considering moving to be closer to grandchildren, looking for lower maintenance alternatives, etc.; it might not be worth it.
- You’re not worried about leaving your home to family – including a spouse who doesn’t qualify to be included in the reverse mortgage. This means your family may be left with the task of selling your home once you’re no longer able to live in it on your own.
Of course, one of the most important considerations to keep in mind when deciding if a reverse mortgage is right for you is whether you can continue making the monthly payments for all the expenses. This includes the expenses already mentioned as well as the costs of maintaining the home, winterizing the home when necessary, keeping up with yard work in summer, and the sidewalks and driveway managed in the winter. It means you’ll need sufficient income to cover the little and not-so-little emergencies as they arise, such as needing a new roof, replacing a furnace, etc. If these things are going to be a struggle, a reverse mortgage may not be your best option.
There are times when a reverse mortgage is an ideal solution for a one-time problem, to supplement retirement income, or to help you accomplish specific goals. But other options may be financially better even if they are, ultimately, less attractive.
When is a Reverse Mortgage the Wrong Solution?
Just as there are times when a reverse mortgage is a wise financial decision, there are also times when it is decidedly unwise. It is a good idea to know the difference and spare yourself some of the pain that could arise from making the wrong decision about this type of mortgage. These are a few situations in which reverse mortgages are unlikely to offer the benefits you desire.
- You have ongoing medical expenses or rapidly declining health. Many people reach out to reverse mortgages as a lifeline as soon as medical bills begin mounting. There are many problems with this scenario, including the fact that you may have to transition to a managed care facility or assisted living situation, making your reverse mortgage a burden rather than a benefit thanks to hefty upfront costs.
- Someone else lives with you. When you have others who depend on the ability to live in your home, whether it’s a younger spouse, children, grandchildren, or borders; if something happens to you so that you no longer live in the home, it could render them homeless or facing an enormous financial burden.
- You intend to leave your home to family. Whether you have a child who wants to hang on to your home for the memories, a spouse who needs to continue living in your home, or simply plan for it to be part of your estate, reverse mortgages place that option in jeopardy.
Additionally, if you are concerned about your ability to maintain the upkeep of the property and your other monthly financial obligations, a reverse mortgage may simply exacerbate an already tenuous situation. It may be better to downsize or consider other options rather than remaining in your current home.
Reverse mortgages get a fair amount of praise and criticism alike. The key is in knowing whether a reverse mortgage is likely to help your financial situation or place it at greater risk. This guide should help you make a better-informed decision about where you fall within the spectrum so you can get the right financial help for your unique situation.