Retirement isn't the time to be worried about money.

Why choose a reverse mortgage?

With the stock market getting volatile but the housing market still hot, reverse mortgages have become a more attractive tool for older Americans who need cash for retirement but want to stay in their homes. A reverse mortgage is a loan that allows homeowners age 62 or older to convert a portion of their home equity into cash. This type of loan is especially appealing to people who want, or need, to supplement their retirement funds.

#1 You remain the owner of your home.

A common misconception of reverse mortgages is that the lender takes ownership of your home. This is false. You continue to maintain ownership of your home, as long as you comply with the terms of the loan and pay your property taxes and homeowner’s insurance.

#2 There are no monthly mortgage payments required from you.

One of the most attractive benefits of reverse mortgages is that payments are made TO you, as long as you live in your home. This is quite different from a traditional forward mortgage where you must pay funds in a monthly amount. With reverse mortgages, you receive funds. The loan is repaid when you sell your home, move to another primary residence, or when the last borrower leaves the home. Borrowers remain responsible for paying property taxes, homeowner’s insurance, and for home maintenance.

#3 You are protected if the housing market declines.

The reverse mortgage loan is insured by the federal government. With federal insurance comes greater security. If the loan ends up amounting to more than the value of the home when sold, government insurance will cover the difference. This means that the loan will be paid in full using only the proceeds your home sells for, and no more.

#4 You may choose from several options of disbursement.

Each individual senior has different needs. Thus, there are different disbursement options to cover different needs. This includes the choice to receive funds in a full or partial sum, a line of credit, monthly payments, or a combination of any of these.

Top pros and cons of reverse mortgages

Pros

  • With interest rates still relatively low and housing prices very high, borrowers can tap an average of close to 60% of their home equity on very good terms as either a lump sum, monthly payments or as a line of credit that carries interest only on withdrawals.
  • Reverse mortgages are non-recourse loans. As long as you pay property taxes and maintenance expenses, you can stay in the house as long as you like and the terms won’t change, regardless of the housing market or changes in prevailing interest rates. The loan is due when you die or leave the home.
  • A reverse mortgage line of credit provides flexibility in managing the distribution of retirement benefits. It allows a borrower to take tax-free withdrawals on the credit line rather than sell investments (and pay taxes) after a drop in the market.

Cons

  • It is easier to qualify for a reverse mortgage, but they are more costly than other mortgages and home equity lines of credit. If for health or any other reason, you don’t stay in the house for long, the costs will seem even higher.
  • If you use the proceeds of a reverse mortgage for questionable spending or risky investing, you’re setting yourself up for financial ruin. If it represents a last resort for funds, you are probably living an unsustainable lifestyle. “The better option is to downsize your home and reduce your spending,” said Hook of EKS Associates.
  • Homeowners are still required to pay property taxes, insurance and maintenance costs on the home. The lender could seize the property if you don’t.

You have three main options for receiving your money. You can choose one or any combination of the three:

Line of credit (adjustable interest rate)

  • Lower cost than a lump sum payment because you’ll only be paying interest and fees on the money you use.

  • You can use a credit line growth feature that allows you to borrow some money now and leave some credit available for the future. Whatever you don’t use in your credit line will keep growing, allowing you to borrow up to a maximum amount stated in your mortgage. 

  • Can be combined with monthly payout.

Monthly payout (adjustable interest rate)

  • Get a set monthly payout to supplement your income.
  • Two choices: Term (fixed monthly payouts for a set number of years) or Tenure (fixed monthly payouts as long as you maintain the reverse mortgage and the payout does not cause the balance to exceed the amount stated in the mortgage).
  • Lower cost than a lump sum payment because you’ll be paying interest and fees only on the money you’ve drawn so far.
  • Can be combined with a line of credit.

Lump sum (fixed interest rate)

  • Withdraw all available funds at once. Amount available may be lower compared to other payment options.
  • Higher cost than a line of credit or monthly payout because you’ll be paying interest and fees on entire loan amount drawn at closing.
  • No credit line growth feature.
  • Higher risk for younger borrowers because the borrower may outlive loan funds.

Note: This information only applies to Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage loan.

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