Reverse mortgage television commercials seem to be the darling of cable networks catering to aging baby boomers these days. Especially those who are 62 and over and who qualify for a reverse mortgage loan. According to financial writer, Tim Lemke, the basic premise of these TV spots is that by allowing lenders to tap into the equity in their homes, reverse mortgages will provide instant relief from financial burden and worry. That said, a reverse mortgage is indeed a financial product engineered for older folks who are either retired or looking to be retired soon. But are they overly hyped when it comes to providing that financial security, we all hope and dream for?
With interest rates at an all-time low, some professionals agree that reverse mortgages are a valuable way to make extra cash while staying in your home for the rest of your days if you so choose. According to Michael G. Branson of All Reverse Mortgage, “Lower rates mean more money for you, the borrower. With interest rates being a primary factor in determining how much money you can receive, borrowers who take advantage of the lowest rates possible will naturally receive more cash and benefits with their reverse mortgage. Branson also adds, lower rates mean better performance of equity retention over the life of the loan.”
But What Exactly is a Reverse Mortgage Loan?
In plain terms, a reverse mortgage is a financial tool that allows you to tap into the equity you’ve invested in your home. But unlike a garden variety home equity loan, line of credit, or credit card advance, you’re not required to pay off the loan while you still occupy the home. What’s even better, is if you have a major amount of equity in your home and qualify for a reverse mortgage, you can receive the funds in one lump sum, allowing you to invest it as you please, or you can receive a monthly payment. In either case, the choice is yours.
Now that you know the basics of a reverse mortgage loan, you might want to find out a few of its pluses and minuses.
- A Reverse Mortgage Means a Stable Source of Income
As Lemke points out, with social security covering only basic living expenses after you retire, you’re going to need another form of income. That income might be derived by a retirement savings plan like a 401K, or even an old-fashioned pension. However, if you don’t have a pension to rely on, or haven’t managed to invest wisely, but you did make the monthly payments on your home of thirty or more years, a reverse mortgage can provide you with much needed extra income.
- A Reverse Mortgage Lets You Stay in Your Home
Many retires fear they won’t be able to afford to stay in their home. Property taxes, maintenance costs, and utilities all add up. So too does the basic cost of living. If you are one of these people, a reverse mortgage will give you the cash you need to cover these monthly costs.
- A Reverse Mortgage Loan Does Not Get Paid Back Until the Home is Sold
Traditional mortgages require you to pay off a portion of the loan on a monthly basis. But a reverse mortgage loan requires no monthly payment. That means you can live in your home for years and years and never pay a dime on the loan. The loan gets paid after you move out and the home if sold. Or it gets paid after you die.
- Reverse Mortgage Loans can be Distributed in One Lump Sum or Monthly Payments
If you have a bunch of outstanding bills and expenses that need to be paid right away, a lump sum payout might be ideal for you. But if you do not have any outstanding debts looming over your head, you might enjoy the financial stability of receiving a monthly payment. The latter choice will assure that you don’t run through your cash balance too quickly.
- Reverse Mortgage Loans are Tax Free
Reverse mortgage cash is not considered income by the IRS. It’s instead chalked up as a loan advance. It won’t have any affect on the amount of money you receive monthly in social security either.
- You Have to Pay to Access Your Reverse Mortgage Cash
The equity you tap into to receive a reverse mortgage is your money. Therefore, it might seem not to make much sense to have to pay interest and fees to gain access to it. If you find having to pay to access your money not to your liking, and you still have time before you retire, you might consider investing in an IRA.
- Reverse Mortgages can be Costly
Maybe you don’t have to pay back a reverse mortgage loan, but there’s lots of upfront costs associated with creating the loan. These include loan origination fees, mortgage insurance premiums, appraisal fees, closing costs, and more. You can roll them into what you earn on the loan, but they add up and can cost you a pretty penny. That’s why it pays to shop around for the most affordable but reputable reverse mortgage lender.
- Reverse Mortgage Loans Must be Paid Back When You Leave Your Home
If you’re considering a reverse mortgage, you might like the fact that you can stay in your home until the day you die without having to pay it back. But what happens if you get sick and need to be moved to a health care facility? Should that happen, the loan needs to be paid back within the year. This could force the sale of your home. If your spouse and any of your dependents still live there, they will have to move.
- Reverse Mortgages Can Deplete Your Equity
You worked hard all your life to put a roof over yours and your family’s heads. That meant making the monthly mortgage payments come rain or come shine. It means you built up a wealth of equity in your home. But when you sign on the dotted line for your reverse mortgage loan, your equity is gone. You get the equivalent of it back in the form of cash. But what if, in the end, that cash proves not enough to live on?
- Reverse Mortgage Means Your Children May Not Get the House
It is commonplace, if not a right of passage for aging parents to leave their home to their surviving children. Often, the children then sell the home and split the profits. But if you invest in a reverse mortgage loan, your children might not receive the home after you’ve passed away. Instead, they will be forced to sell the home in order to pay the reverse mortgage loan off. On a positive note, reverse mortgages are non-recourse loans so the kids will not end up shelling out of pocket for closing costs and other related expenses if the sale of the home doesn’t cover the loan amount.
If you are an aging homeowner who has built up a lot of equity in your home but doesn’t have a good enough income stream to get you through your golden years, then going with a reverse mortgage loan is a very good option. But like all things financial, reverse mortgages have their pros and their cons. Before signing on the dotted line, it is a good idea to consider them both.