Reverse mortgages have a bad reputation. Too often, they’re painted as fast-money schemes that ultimately cost you. However, with the right financial planning, a reverse mortgage can be a way to keep yourself flush with cash during your retirement.
Essentially, a reverse mortgage allows you to sell your home but continue to live in it. When you pass away, the cost of your loan can be covered by the house. You won’t have to make any payments during your lifetime.
It’s easy to see the allure. Reverse mortgages are only available to people who are 62 or older. Senior citizens hoping to retire need to take advantage of as many income streams as they can. Life expectancies are increasing and the world is expensive. Most people can’t survive on their social security payments alone.
With a reverse mortgage, you set up a line of credit or you can receive a hefty chunk of cash or you can set up monthly payments that will be sent to you as long you continue to live in your home. Whatever you do, you’ll be supplementing your income.
However, it’s still a loan. You need to be aware of every single term of the agreement. You also need to make sure that you thoroughly vet your team. Bad advice can get you into a lot of trouble.
If you want to make the best deal for you and your family, you need to go into the arrangement with your eyes open. Here’s what you need to consider.
- It’s Expensive
Your primary motivation for a reverse mortgage is to increase your cash flow. However, you still have to pay closing costs and they’re often higher than with a traditional mortgage. You’ll have to pay a lot of money of upfront. The costs are mixed into the loan, which is helpful if you don’t have the cash on hand but doesn’t change the fact that your money is being eaten into. The total costs of a reverse mortgage can be as high as four percent of the home price.
“We can’t stress enough to the borrower that if they’re comfortable with it, they should have conversations about the reverse mortgage not just with the spouse but the heirs, or others — anyone who they trust and can offer input on whether this is the right program for them,” Steve Boland, Bank of America reverse mortgage executive, said.
Figure what your rates and fees are before making any commitment.
- You Have Options
You have multiple payment options. You can get a lump sum, a monthly payment, a line of credit, or a combination. Figure out what exactly how you plan to use the money and you’ll be able to choose the best option.
If you’re trying to get the funds to pay a big expense like a boat or a luxury vehicle, a lump sum payment or line of credit is what you need. If you’re just looking to have more cash every month, consider the monthly payments instead.
- Your Spouse Matters
If you want to make sure that your spouse is taken care of when you pass, make sure that your house is in their name too. Otherwise, when you die, your spouse will be forced to pay back the loan money if they want to keep the house.
This is the type of detail that should be hammered out by your mortgage consultant. That’s why it’s so critical to pick a strong team to advise.
- Your Heirs Probably Won’t Inherit Your House
When you die, the reverse mortgage loan needs to be paid off. This can be done by selling your house or your heirs can cover the amount themselves if they’d like to hold onto the property. However, if you’re hoping to have your home pass into the hands of your heirs, a reverse mortgage probably isn’t for you. There’s a good chance that your family will not be able to cover the costs of the loan on their own.
A reverse mortgage can be a great option for seniors who don’t want to leave their home to their heirs and need the cash. It shouldn’t be the first option that you turn to. There are other retirement funding options that you should look into before saddling yourself with more debt.
However, if you’re low on cash and have a lot of equity in your home, a reverse mortgage can really help you.