You can’t watch TV today without seeing the ads for reverse mortgages. But what are they and more importantly how can they help? While it seems like reverse mortgages are fairly new, they have been around since the 1960’s. The concept is rather simple, seniors over 62 can tap into the equity in their home while freezing mortgage payments until the time you move from or sell your home.
OK, this sounds like a good deal. But how do you know if a reverse mortgage is right for you? Well, this article will take a deeper look. This way you can decide is this option fits into your retirement plans or not.
Reality of Today’s Seniors
For today’s seniors, it is the best of time and it is the worst of times. On the one hand, we are living longer, more active lives and this means that we can truly enjoy our retirement. Today’s seniors have also had to live through one of the most volatile economic periods in the history if the U.S.
When times are good, they are very good. The stock market soars, home prices soar, and we are all richer – at least on paper :-). But when times are bad, they can be very bad. Uncertainty has hit the job market and the promise of lifetime employment is long gone.
In addition, today’s seniors have had to live through the combined blows of the dot-com collapse the financial crisis. These twin crises have had a profound impact on the retirement plans of millions of Americans. As such, many have begun to consider the possibility of using a reverse mortgage to help to pay for retirement.
Reasons to Get a Reverse Mortgage
When is the right time to get a reverse mortgage? While there are no fixed rules, some potential answers include when you need extra money to cover retirement expenses, when you want to purchase a home for retirement, or if you want to set up a rainy-day fund.
Again, the answer will come down to the specifics of your situation. The one thing to know about a reverse mortgage is that the option will allow you to access funds without having to pay any debt service costs over the life of the loan.
Instead, the principle and interest will accrue over the life of the loan and then the loan will be repaid once you either sell or move from your home. While this sounds like a great deal, a reverse mortgage is not exactly free money. To keep the loan current, you need to remain current with your homeowner’s insurance policy, property taxes, and utilities.
So, back to the reasons to get a reverse mortgage. The answer lies in how secure your retirement plan is. If you are looking at significant shortfalls, then you might want to consider a reverse mortgage to help.
Advantages and Disadvantages
As mentioned, reverse mortgages are not free money. In fact, these loans include requirements such as income verification, insurance coverage, and the need to properly maintain a home. The latter might be a challenge for borrowers who are not in good health as failure to maintain their home could lead to foreclosure.
In addition, having a reverse mortgage does complicate a borrower’s wish to bequeath their home to their heirs. The reason is that the bank which issued the loan will essentially hold the first position when the will is read. As such, a borrower’s heirs must either pay the remaining balance due on the home or agree to let the bank sell the home before they can inherit any residual value.
However, this does not mean that reverse mortgages are bad. There are instances when getting a reverse mortgage does make sense and a complete list of advantages and disadvantages can be found here.
One major plus with a reverse mortgage is that the Government has made it harder for a borrower to be ‘under water’ on their loan. This is a big plus as it makes it harder for a borrower to owe more on a reverse mortgage than their home is worth. However, the guidelines which protect borrowers also placed strict limits on how much can be borrowed.
In the right circumstances, a reverse mortgage can make sense. However, you want to make sure that you have a clear understanding of your retirement plan and how a reverse mortgage will fit in. This will help you to make the right decision when it comes to leveraging your home to pay for your retirement.