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Is a Reverse Mortgage Right for you?
Is a Reverse Mortgage Right for you?
August 11, 2023 / Kale Havervold
Is a Reverse Mortgage Right for you?
August 11, 2023 / Kale Havervold

As you get older and retire, you generally bring in less money than you did while you were younger and employed. This can make it difficult to pay for your lifestyle expenses, especially as the cost of living continues to rise. Many people also begin to incur more medical costs as they age.

If you’re looking to supplement your retirement income, you may be able to benefit from a reverse mortgage. A reverse mortgage is the opposite of a traditional mortgage. You don't borrow funds to purchase a home but instead, take out a loan using your home equity.

Read this guide to learn more about reverse mortgages and if one is the right choice for you.

What Is a Reverse Mortgage?

It is a loan that homeowners can use to convert some of their home equity to cash. You can generally use these loans for whatever you want, but some can only be used for things like home improvements or medical expenses.

There’s no requirement to make payments throughout the life of this loan. You do need to eventually pay it back (plus interest), but the loan doesn’t have to be settled in most cases until you pass away, move out, or sell your home.

To calculate a reverse mortgage amount, lenders look at how much equity you have, the value of your home, the interest rate you get, and your age. To get a reverse mortgage, you need to be a homeowner and, in most cases, be at least 62 years old. However, some reverse mortgages are available to those as young as 55.

You can also only borrow against your primary residence. Scams are common in this industry, so do your homework and find the best reverse mortgage companies to work with.

Pros

  • No need to make regular repayments
  • The money you borrow is tax-free
  • Different payment methods (lump sum, installments, etc.)
  • Won’t owe more than the property is worth
  • You can “age in place” and don’t need to move

Cons

  • High loan closing costs
  • Reverse mortgage interest rates can be high
  • There may be prepayment penalties
  • You can lose your home if you’re not careful

When a Reverse Mortgage Might be Right for You

Here are a few situations where a reverse mortgage might be a good choice.

You have significant retirement costs and have equity in your home

If your savings are dwindling and/or your retirement income can’t keep up with your costs, a reverse mortgage enables you to use some of the equity you’ve built up over the years to pay for your day-to-day expenses. Of course, make sure you read the fine print and speak with the reverse mortgage lender about any potential restrictions on what the money can be used for.

You can keep up with the financial demands of owning a home

A lot more goes into owning a home than just paying the mortgage and being done. This includes home insurance, property taxes, utilities, and more. To keep your reverse mortgage active, you must ensure you can keep up with these financial responsibilities as you age.

If you fall behind for any reason, you could lose your loan. Not paying your home insurance and skipping on property taxes puts your home at risk, and lenders don’t like when their collateral is at risk.

When you miss out on property taxes, the city could put a lien on your home (a legal claim that a lender or other entity places on your home until you pay your debt).

A lien on your home is a public record and can make it difficult to sell or refinance. If you continue to fall behind, the government could foreclose your home.

Not paying home insurance means you have no protection if a fire or natural disaster devastates your property.

In some cases, if the lender is worried that your home is in jeopardy in some way, it can declare your loan as being due. If you can’t pay it back at this point, you could end up losing your home. As a result, make sure you can stay on top of these bills.

You plan on staying in your home for a long time

Reverse mortgages make the most sense if you plan on staying in your home for a long time. If you plan on moving out or selling soon, the loan becomes due, which means you mightn’t get much benefit out of it.

A big reason for this is closing costs . Like other loans, reverse mortgages have numerous closing costs you’re responsible for paying. This includes mortgage insurance, loan origination fees, appraisal, taxes, lawyer fees, and more. These can easily coadd up to thousands.

If you need to repay the loan soon after taking it out, these costs might not be worth it.

When a Reverse Mortgage Might be Wrong for You

Here are a few indicators that a reverse mortgage might be the wrong choice for you.

You don’t have a lot of home equity

The lower the amount of home equity you have, the less you’ll be able to borrow with a reverse mortgage. A reverse mortgage is a long-term plan to help stabilize your finances as you age and boost your retirement income, and you need to borrow a significant amount to make that a reality.

If you barely have any equity, you’ll quickly go through the funds you receive in a reverse mortgage. Also, if you still have a sizable mortgage, you may want to avoid getting a reverse mortgage, as any funds you get from a reverse mortgage need to be used to pay off your existing mortgage before it can be spent on anything else.

You live with people that aren’t co-borrowers of the reverse mortgage

A reverse mortgage may not be right for you if you live with friends, roommates, cousins, or someone else who isn’t your spouse or kids. This is because if you, as the borrower, pass away, the loan becomes payable, and the home may need to be sold in order to pay the debt.

Similarly, the loan becomes due if you move out and the home is no longer your primary residence. This will leave the person who relied on you for housing with no option but to move out. While there are protections for spouses to keep a home if you die, this isn’t the case for others living in the house, and they’ll need to vacate.

You want to pass on your home to heirs

If you want to be able to pass your home on to your kids or another family member when you die, a reverse mortgage can make that process more confusing and expensive. Your heirs will either need to pay the loan to keep the home or let the lender sell it to recoup its money.

This can lead to a difficult decision for heirs as they decide whether the home's sentimental value is worth the cost.

Closing Summary

A reverse mortgage is helpful for getting the money you need to pay for expenses later in life. While it can be a great solution for some, it isn’t always worth it and can certainly be the wrong option at times.

Always consider your unique situation and your home equity before taking out a reverse mortgage. Consider contacting a reverse mortgage counselor if you’re still unsure whether it's right for you.

By Kale Havervold
Kale Haverold is an esteemed freelance writer, leveraging over five years of expertise in the fields of business and personal finance to analyze and comprehensively review online colleges. With a BSc in Sociology, a Minor in E-commerce, and a certificate in Business Administration, Kale brings a unique blend of academic insight and practical knowledge to his evaluations of online educational institutions. His passion for sharing knowledge through research-driven, easily digestible articles has led to his work being featured on prominent platforms such as Yahoo, Expert Market, Hardbacon, and Loans Canada.
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