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Need Some Extra Cash for Retirement? Consider a Reverse Mortgage

By
Industry Observer with LendingTree

Meeting unexpected costs during retirement can be difficult if you don't have much income coming your way. Oftentimes social security and savings may not be enough to meet an emergency expense, and many retirees don't bring in enough in monthly income to afford a home equity loan. In these cases, it may be worth considering a reverse mortgage which gives you cash today and doesn't require repayment until the home is sold. 

 

How Does a Reverse Mortgage Work?

Reverse mortgages allow you to trade future equity in your home for cash today. While typically received as a lump sum, you can receive your payout in the form of a line of credit, or even in regular installments to mimic the steady income flow of an annuity. 

The maximum amount anyone can withdraw is the appraised value of the home, although you'll likely be limited to a smaller amount than that. Unlike a regular mortgage, reverse mortgage loans require no monthly payments, or any kind of repayment until the home is sold. This makes them viable solutions to the cash-needs of senior citizens. However, like any other mortgage loan, they entail their own fees and closing costs.

 

Do I Qualify for a Reverse Mortgage?

Only homeowners aged 62 or older are eligible to take out reverse mortgage loans. You'll also need to own your home outright (rather than owing a significant amount on a mortgage), however in most instances, lenders are willing to accomodate borrowers who are close to paying off their mortgage loans. Finally borrowers must not be delinquint on any form of federal debt, this includes but isn't limited to debt issued by the VA, FHA or even co-signed federal student loans.

Keep in mind that reverse mortgages can only be taken out against your primary residence, which means that if you're trying to cash out on a rental home or investment property, you'll likely need to go with a home equity loan or HELOC. The FHA also mandates its own minimum standards for property types when it comes to the types of homes that are eligible for a reverse mortgage. 

 

Is it a Good Idea To Get a Reverse Mortgage?

While a reverse mortgage sounds like an easy way to pull cash out of your property. You'll want to consider the risks and incremental costs of obtaining one. First of all, the total costs of a reverse mortgage will factor in fees for origination, mortgage insurance and closing costs, like most standard mortgage loans. Depending on the value of your home, you could pay up to $6,000 in origination fees alone.

Additionally, because you won't need to pay back your debt until the home is sold, the interest expense on a reverse mortgage will continue to accrue unchecked; this can get expensive if you decide to forgo making repayments altogether. Nevertheless, homeowners can take comfort in the fact that they or their heirs will never be underwater on their reverse mortgage, as the vast majority of reverse mortgage loans are non-recourse, and will never exceed the value on the home.

At the end of the day, you'll want to balance out your cash needs against the costs of taking out a reverse mortgage. For many retirees who aren't able to save enough for retirement, but own their homes outright, a reverse mortgage can be a good way to live their desired retirement or fund emergency expenses they can't easily meet. However, the eventual costs of the reverse mortgage will need to be factored in, especially if you intend to relocate during retirement, or wish to bequeath your home as part of your estate. Remember to consider all the costs and benefits before you move forward with a reverse mortgage.

 

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