You’re retired, over 62, and in need of a little extra cash. Is a reverse mortgage a good idea?
It depends on your financial health. If you’re buried in debt and a reverse mortgage will only offer a brief reprieve from your creditor’s calls, getting the loan is a terrible decision. However, if you’re somewhat stable and the loan will help you cover your expenses, it might be a good choice.
Retirement is expensive. People don’t want to retire in squalor. They want to maintain a comfortable, easy lifestyle. To do that, you need to make sure that you have enough money to afford everything that you want.
What is a Reverse Mortgage?
In a traditional loan, the borrower makes payments every month, part of which are used to chip away at the principal loan amount. The borrower’s equity increases over time until eventually the mortgage is paid off and the borrower owns the home.
A reverse mortgage works in “reverse.” It’s a specialized home-equity loan available for people who are least 62. The lender gives the borrower a lump sum, monthly payments, or a line of credit. The loan grows as it accrues interest and the borrower’s equity decreases.
When the borrower dies or moves out of their house, the loan becomes due. The obligation is usually satisfied by selling the house. If the sale isn’t enough to cover the loan, the lender eats the loss. If the sale exceeds the loan price, your estate is entitled to the profit.
Reverse mortgages are reserved for people who are 62 years old or older. You must be free from federal debt and owe very little on your home. Properties that you own but don’t reside in aren’t eligible.
How Much do Reverse Mortgages Cost?
A reverse mortgage isn’t free. There are many costs that you’ll have to deal with. Usually, the closing costs associated with the loan are rolled into the principal amount, so you don’t need to have the cash on hand.
Reverse mortgages typically cost more than traditional ones. You’ll have to pay:
- Closing costs
- Originator fees
- Mortgage insurance
- Monthly fees (if you choose to have your loan disbursed as monthly payments)
What are the Benefits?
The biggest benefit of a reverse mortgage is that it can fund your lifestyle.
You will no longer be responsible for making a monthly mortgage payment. Fewer bills can be a huge relief. You’ll also have more money at your disposal because of the loan. Even if you choose a lump sum payment, you can’t go broke immediately. Rules restrict how much a borrower can access at once.
A reverse mortgage could be exactly what you need to tide over your retirement days, especially if you’re attached to your house. You can get receive the benefits of selling your house without ever having to move out.
If you’re thinking about a reverse mortgage, speak to an expert. You can review a list of approved lenders before you make any calls.
What are the Drawbacks?
A reverse mortgage might seem like a dream come true. After all, your mortgage payments will disappear, you’ll receive a chunk of cash, and you never have to leave your home. It’s important to remember that it’s still a loan. The money will need to be repaid.
If you want to leave your house to your heirs, a reverse mortgage can hinder your plans. When you pass away, your loan will become due. Your heirs will either have to sacrifice the house or pay the balance in cash.
A reverse mortgage won’t help your finances if you’re in serious financial trouble. You have to be able to maintain your house or your lender can make the loan due immediately. You have to cover property taxes, routine maintenance fees, etc.
You also need to be healthy enough to stay in your home. If you have severe medical problems, you may need to transfer to an assisted living facility. Once you do, the lender can demand repayment. Unless you have the funds to satisfy the obligation, your house will be sold while you’re still alive.
A reverse mortgage can be beneficial or it can be a mistake. Whether it’s a good idea or not is highly dependent on your financial circumstances. If you have too many money problems, a reverse mortgage is simply delaying the inevitable. On the contrary, if you’re flush with cash, a reverse mortgage is unnecessary.
A senior whose nest egg needs a little extra padding and has no plans to will their home to anyone is a good candidate for a reverse mortgage.