If you are over 62 years old and own your home outright, you may have been targeted by advertisements trying to get you to consider a reverse mortgage. Many cash-strapped seniors think about reverse mortgages as a viable option to supplement Social Security income and be able to afford to do more in their retirement. Still, these loans aren’t for everyone. While they have their benefits, reverse mortgages also have risks associated with them that could make one a bad financial decision for you. Here is a look at some of the basics of reverse mortgages and the pros and cons of getting one.
How Do Reverse Mortgages Work?
You can think of a reverse mortgage as a loan that you take out to cash in on the equity that you currently have wrapped up in your home. Say that you have paid off the loan on your home and find yourself with a house worth $250,000. Once you are retired, you may find that Social Security income alone isn’t enough to finance your lifestyle, but you don’t have access to the investment you’ve made in your house unless you sell your home and move into a cheaper alternative. Reverse mortgages allow you to borrow money from the bank against your home. You don’t have to repay the loan until you either move out of your house or until you die, so you can stay in your home for as long as possible while still benefiting from its equity. Depending on the terms of your loan, you may receive money monthly or be able to cash in the entire value of your home in one lump sum.
What Are the Benefits of a Reverse Mortgage?
Taken at face value, a reverse mortgage might sound like a great deal. After all, it allows you to stay put in your house while still having access to enough money to live more comfortably. The payouts taken from a reverse mortgage also aren’t taxable, so you don’t have to worry about losing your Medicare or Social Security benefits. As an added bonus, most lenders don’t place any restrictions on how you use the money you borrow, so many seniors can enjoy luxuries that might never have been possible without the extra income provided by the loan.
What Are the Disadvantages of a Reverse Mortgage?
Like most financial products that seem too good to be true, the cons of opting for a reverse mortgage are numerous enough to make many seniors reconsider. For one, the costs associated with taking out one of these loans are extremely high. Not only do you need to pay closing costs and other fees up front (just like a regular mortgage), but you will also incur several fees throughout the life of the loan. You’re still left responsible for paying property taxes, home insurance, and maintenance costs to keep your house up to a certain standard. In addition, reverse mortgage holders are required to purchase mortgage insurance, which protects the lender in case the overall value of your home decreases during the lending period.
While the money you receive as a payout in your reverse mortgage may feel to you like a major windfall, you also have to remember that it does have to be repaid at some point. Many times, seniors will end up needing to move into a retirement community or nursing home, which prompts the loan to need to be repaid immediately. If you need to sell the house in order to repay your debt, any dependents who have been living in the house with you could end up without a place to stay. Along the same lines, the mortgage must be repaid in full (with interest) when you die, which could severely reduce or even eliminate the inheritance you are able to leave any of your descendants.
Who Should Consider a Reverse Mortgage?
Most financial experts will agree that the only seniors who should consider a reverse mortgage are those that really have no other choice. It’s best to explore all your other options before settling on a reverse mortgage because the risks tend to outweigh the benefits for many borrowers. You likely worked hard for years to pay off your home in the first place, so you need to think long and hard before you decide to make a move that could potentially cause you to lose all your equity. For some seniors, a reverse mortgage will be the only way to finance retirement, but others find that there are better and safer options.