The home is often considered an “investment.” Many of us buy a home in the hope that it will build equity and that it will be a valuable asset down the road. Of course, being able to tap that asset when you need to is one of the most important aspects of homeownership.
This is where a reverse mortgage comes in. For the right candidate, a reverse mortgage can be a smart move that provides income as needed during retirement years.
An Overview of the Reverse Mortgage
It’s important to understand that a reverse mortgage is a type of home equity loan. However, unlike more traditional home equity loans that require you to begin repaying the debt relatively quickly, a reverse mortgage isn’t repaid until you sell the home, or until it’s no longer your primary residence.
With a reverse mortgage, you can choose to receive a lump sum, or you can choose to receive regular payments. For those looking for regular income, this can be helpful, since it can smooth cash flow issues. But before you pull the trigger, you need to make sure that a reverse mortgage is actually right for you.
Downsides to Reverse Mortgages
There are some pitfalls to avoid when you get a reverse mortgage, however. While it’s nice that a reverse mortgage doesn’t rely on income or credit, you do need to realize that fees and interest are often higher with these types of mortgages.
Reverse mortgages are designed for retirees. In fact, you can’t get a government-backed reverse mortgage unless you are at least 62 years of age. If you get a reverse mortgage at a lower age, you run the risk of losing the protections that come with a HUD-approved reverse mortgage.
Even a HUD-approved reverse mortgage is likely to have high fees and interest rates, so be prepared. A reverse mortgage is entirely based on the equity you have in your home, so if you don’t have the mortgage paid off, or mostly paid off, you might not be approved. Additionally, the higher your remaining balance, the bigger the impact of fees and interest in reducing the amount you actually receive.
Another pitfall that many reverse mortgage borrowers run into is moving out. If you are moved to a long-term care facility and no longer live in your home, the loan comes due, and you have to start making payments. This can be stressful when you are paying for long-term care as well as making loan payments. Additionally, your heirs may be forced to sell the home to pay off the reverse mortgage after you die.
Who Does a Reverse Mortgage Work For?
In most cases, a reverse mortgage is meant for retirees who need a little extra in terms of cash flow. If you need to close a gap between what you need, and what you get from other retirement income sources, a reverse mortgage can help with that. It can also help in some cases if you plan to make a large purchase.
However, you also need to have a contingency plan set up so that you are prepared if you move out of the house. You can pay off the reverse mortgage when you sell the home to downsize, but if you go into a care facility, you will need to have a way to repay the loan. HUD-approved mortgages can’t require you to repay more than the home’s current market value, so if your home loses value, you are protected.
A reverse mortgage can be helpful to some borrowers, but it’s not for everyone. Carefully consider your options and consult a professional before deciding on a reverse mortgage.