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Six things to consider before taking a reverse mortgage
Six things to consider before taking a reverse mortgage
August 11, 2023 / Catherine Miller
Six things to consider before taking a reverse mortgage
August 11, 2023 / Catherine Miller

For many people, their senior years are a time to take things easy. But funding your life in retirement can be tricky, especially with rising inflation making cash savings less valuable.

That’s why many seniors now look to unlock value from their homes through equity release. This can give you the money you need to continue a comfortable lifestyle in your older age.

Getting a reverse mortgage is one way to release equity from your home without selling it. But it’s important to consider the pros and cons before committing to this type of loan.

In this article, we’ll run through the things you need to think about before taking out a reverse mortgage and give tips on finding the best reverse mortgage for you.

What Is a Reverse Mortgage?

A traditional mortgage lends you money to purchase a property. You then repay this money to the lender over time, with interest applied. You gradually own more of the property as you repay (increasing your equity share) until you eventually own the whole thing.

In contrast, with a reverse mortgage, you get a payment from the bank based on the value of your existing property (or the equity you hold in it). This means you can leverage your asset (the equity you hold in your property) to get cash.

You don’t need to repay a reverse mortgage while living on your property. When you pass away, the lender will take some or all of the proceeds from the sale of your property (depending on how much equity you’ve leveraged) to repay the loan.

The most common form of reverse mortgage is a Home Equity Conversion Mortgage (HECM). It’s backed by the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). You may also get a proprietary loan that isn’t government-backed.

Many reverse mortgage companies are out there to support you with this process. Before you decide to go ahead, though, be sure to consider the following six points.

1. Am I Eligible for a Reverse Mortgage?

Not everyone can take out a reverse mortgage. Generally, you’ll need to meet the following requirements :

  • Aged 62 or above
  • Living in your property, which is your main residence
  • With an eligible property type (see the requirements here )
  • Have paid off most of your original mortgage loan, in most cases owning at least 50% of the property
  • No federal debts

You may be able to find an option for you if you don’t meet all of these criteria. For example, if you’re looking for a reverse mortgage at age 55, some loans are now available for the younger age category, although it’s important to do your research and check out the terms and conditions before you sign up.

2. Will I Benefit From a Reverse Mortgage?

There are a few reasons why a reverse mortgage might be the right choice for you. The first is flexibility. Reverse mortgages allow you to choose how to receive your repayments, whether as a lump sum, line of credit, or fixed monthly payments.

This means you can choose the option that suits you. For instance, you can use a fixed monthly payment to pay for at-home care. Or, you could opt for a lump sum to make a large purchase.

You also won’t need to make regular repayments on your loan. Remember, the repayment comes at the end of your life. You won't have to pay taxes on the money you get since it's treated as a loan advance rather than income.

3. Does a Reverse Mortgage Put Me at Risk?

There are some risks to taking out a reverse mortgage. The first to consider is that you will need to continue living in your property. If you have to move out, for example into a senior living facility, you may have to repay the loan early with cash or sell your home to make this possible.

Secondly, you need the resources to keep your home in good condition to satisfy the lender’s requirements. If your property value falls too much, you might have to repay the loan early.

You’ll also need to pay some additional fees and charges when taking out your loan. If you don’t wrap these costs into your loan amount, you’ll need the cash to pay for these separately.

There are also, sadly, a number of scams targeting seniors looking for equity release solutions. Be aware of what to look for in choosing a reputable provider. If someone gets in touch with you out of the blue offering a loan, it’s likely they aren’t a legitimate lender.

Many top reverse mortgage companies provide counseling to help you determine if a reverse mortgage is right for you (which may even be mandatory before you can take out the loan). Take advantage of this to make sure it’s the best path.

4. Does a Reverse Mortgage Fit My Future Plans?

As mentioned, you’ll need to continue living in your home to benefit fully from your reverse mortgage. This won't be the right solution if your retirement plans involve downsizing or moving to another location.

Importantly, if you’re thinking of leaving an inheritance to your family, remember that when you pass away, the lender will take some or all of the house sale proceeds to repay the loan. Or your heirs will need to pay off the loan in full using another funding stream to inherit the property. So make sure you’ve considered the future before committing.

5. How Much Can I Borrow With a Reverse Mortgage?

The amount you can borrow will depend on your age (or the age of your spouse if they’re younger), the value of your property, and current reverse mortgage interest rates. If applying for a government-backed HECM, you can only borrow up to $1,089,300 ( 2023 limit ). You’ll need to look at your predicted expenses and how long you expect to live to determine if your potential loan amount will be enough.

6. Which Reverse Mortgage Lender Should I Use?

If you’re sure you want to go ahead with the loan, check out the best reverse mortgage lenders to find out which is suitable for you. You should check the lenders’ credentials and reputation, compare the offered interest rates and fees, and obtain quotes to find out how much you could borrow.

Don’t forget to get counseling from a trusted advisor if you’re not sure of what to do.

Conclusion

A reverse mortgage is a great option if you want to release equity from your home to fund your senior years. However, you need to weigh the risks and benefits to ensure it’s the right choice for you and your family. Be clear on how it fits your plans, and choose your lender carefully. Then enjoy your retirement with fewer worries!

By Catherine Miller
Catherine Miller is a lead member of personal finance and pension innovator Maji, where she’s responsible for content creation and running Maji’s personal finance masterclass, among others. Miller also holds degrees in English and education, and worked as a teacher before moving into finance. Today, she combines aspects of education and personal finance to help readers make better decisions in finance and beyond.
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