If you’re a homeowner, with high equity and near retirement age, a reverse mortgage commercial has surely crossed your path. These reverse mortgage loans sound pretty appealing on the radio or on your TV commercials. It is especially intriguing if most of your net worth is tied up in your home value. But there are definitely some downsides so let’s explore both the pro’s and con’s to help you decide if a reverse mortgage is right for you.
First, let’s define what a reverse mortgage is. It is a loan against your home equity which does not have to be repaid until you die, sell the home, or move out permanently. The amount of money you can borrow depends on your age, the value of your home and current interest rates. To qualify for a reverse mortgage you must own your home outright or have a low enough mortgage balance that it can be paid off with the proceeds from the reverse mortgage loan.
Now let’s explore some of the pro’s: One big pro is that this type of loan can help secure retirement income. Since there are no payments required as long as you live in your home, it gives retirees another source of monthly cash flow they can rely on. Another pro is that you can stay in your home. This is a big deal for many retirees who want to age in place and not have to move out of their longtime home and community.
Another plus: Your existing mortgage balance will be paid off with the proceeds from the reverse mortgage loan. This means there are no more monthly payments to make on your home, which gives you some extra cash flow each month. Plus, there’s no tax liability on the money you receive from a reverse mortgage – it all goes straight into your pocket! Finally, if the balance of your reverse mortgage exceeds the value of your home when it’s time to sell, HUD (the department that oversees these loans) will step in and pay the difference.
On the flip side, there are some potential cons to consider as well. First, if you do not live in your home for 12 consecutive months or more, the loan can become due and payable. This could lead to a situation where you have to sell your home in order to repay the reverse mortgage loan – something that might be difficult if the market is down when you want to sell. Second, reverse mortgages can impact other retirement benefits you may be receiving. For example, if you’re on Social Security, part of your monthly benefit may get clawed back once you start taking money out of your reverse mortgage account. Finally, these loans are complicated so it’s important to understand all of the details before signing up.
All in all, a reverse mortgage can be a helpful tool for retirees who want to stay in their homes and receive some extra cash flow each month. But it’s important to weigh the pro’s and con’s carefully to make sure this type of loan is right for you. Talk to a trusted financial advisor or reverse mortgage specialist to learn more.