Many seniors struggle financially in retirement. If you need a way to generate extra cash, you might be contemplating a reverse mortgage. But while signing up for a reverse mortgage might be a reasonable solution for you, it's not right for everyone.
How does a reverse mortgage work?
Also known as a home equity conversion mortgage, or HECM, a reverse mortgage is a type of home equity loan designed specifically for seniors. With a traditional mortgage, you borrow money and make payments to your lender over time. With a reverse mortgage, the opposite happens -- a lender makes payments to you in exchange for equity in your home. Furthermore, that loan isn't repaid until you die, sell your home, or vacate your property for more than a year.
The amount you're able to borrow with a reverse mortgage will ultimately depend on your age coupled with the value of your home. In fact, reverse mortgages can actually be somewhat risky for lenders because the loans themselves are only backed by the home values behind them. If you die owing $250,000 on a reverse mortgage and your home only sells for $225,000, your lender will be short $25,000, and can't sue your estate, or come after your heirs for the difference.
To be eligible for a reverse mortgage, you must meet certain criteria. First, you need to be at least 62 years old. Next, you must not only own your home, but have enough equity in it to support your loan. Furthermore, the home needs to be your primary residence and must conform to certain HUD standards.
Benefits of reverse mortgages
The primary benefit of a reverse mortgage is that it puts cash in your pocket to help you cover your retirement expenses. You won't have to give up the title to your home or sell it to get your hands on that money. Rather, you can continue to live in your home and even use the proceeds of your loan to help cover your monthly mortgage payments.
Furthermore, a reverse mortgage can help you delay cashing out your retirement savings. This can be beneficial if your investments are performing well, or if the time isn't right to liquidate them to free up cash.
Additionally, a reverse mortgage might help you delay Social Security and increase your benefits as a result. For every year you delay Social Security past your full retirement age, you'll get an 8% boost in benefits up until age 70. This extra income could be crucial as you navigate life later on as a retiree.
Drawbacks of reverse mortgages
Of course, there's a downside to getting a reverse mortgage. For one thing, the fees and closing costs on your loan can be quite high. Not only that, but interest rates on reverse mortgages tend to be higher than rates for traditional home equity loans. Between these fees and interest charges, you might end up with less available cash to work with than you'd expect.
Furthermore, if you're struggling to afford your home, a reverse mortgage may not offer much in the way of a solution. Even with a reverse mortgage, you're still responsible for maintaining your home and paying property taxes on it. If your loan amount doesn't enable you to cover these costs, you may wind up having to move, regardless.
Finally, if you're hoping to leave your home to your children, a reverse mortgage might deter you from meeting that goal. Remember, with a reverse mortgage, your loan is paid off when you sell your home or when you die. So if you pass before vacating your home, your property will be sold to pay off your loan balance, which means it won't be available for your heirs.
Weighing your options
If you're having a hard time keeping up with your living costs, a reverse mortgage could give you access to money you don't need to worry about paying back. And if you don't have children, or aren't worried about leaving your home to someone else, it could be a smart solution to your financial woes. On the other hand, reverse mortgages have their share of drawbacks, so be sure to weigh the pros and cons before making your decision.