A reverse mortgage can be a terrific solution for those who find themselves cash-poor in retirement. It's far from a simple thing, though, and it does have some drawbacks and warrants some cautions. If you're thinking of getting a reverse mortgage, here are some smart reverse mortgage moves you might want to make.
- Be wary of anyone urging you to get a reverse mortgage.
Reverse mortgages are sometimes pushed by those with conflicts of interest and those who may not offer you the best deal. Do your own homework, shop around, and perhaps approach lenders on your own instead of through a salesperson.
- Think of the reverse mortgage as a loan, and not as an investment.
With a reverse mortgage, you essentially borrow money based on your home equity and don't have to pay it back until you die or stop living in your home. The lender pays you in regular installments or a lump sum or gives you a line of credit. Don't let any salesperson tell you that a reverse mortgage is a smart investment. They generally cost a lot and are not all about growing your wealth.
- Know that a reverse mortgage will often remove your ability to leave your heirs your home.
If you've been planning to leave your home to your loved ones, a reverse mortgage can remove those plans. When you die or permanently leave your home (such as by moving into a nursing home), your loan will often need to be repaid. They often requires the immediate sale of your home. But if your heirs can pay off the loan, they may be able to keep the home.
- Know that the amount you have borrowed will increase over time.
When you get a reverse mortgage, it won't be for the total value of your home. It will be for a portion of that, and your loan balance will rise over time, as interest costs are added to it. When the mortgage ends and the loan needs to be repaid, you won't be on the hook for more than the balance of your home.
- Know that as with regular mortgages, there will be closing costs.
Reverse mortgages tend to be more costly than regular mortgages. The kinds of costs you may pay include a loan origination fee, servicing fees, and title insurance. Typically there's also mortgage insurance.
- Know that reverse mortgage income could hurt you in unexpected ways.
Receiving income from a reverse mortgage might hurt your eligibility for various benefits, such as Medicaid and Supplemental Security Income.
- Include your spouse in the reverse mortgage or have a provision for him or her.
The amount you can borrow with a reverse mortgage depends in part on the age of the borrower, and when a couple is borrowing, it's typically the age of the younger one that matters. In the past, when reverse mortgages have been taken out by one partner who later dies or moves out, the other partner has sometime been forced to sell the home or has defaulted on the loan and faced foreclosure. Recent regulations have better protected spouses, but it's worth looking into the terms of the reverse mortgage you're considering, to learn just how your spouse will be treated and whether it's smart to have both of you as borrowers. Note, too, that any children or others who live with you may be adversely affected by a reverse mortgage coming due.
- Before getting a reverse mortgage, consult a financial counselor.
You can find a reverse mortgage counselor via the U.S. Department of Housing and Urban Development's website or their housing counselor referral service at 800-569-4287. You might also consult with a financial advisor or two, to explore all your options and make informed decisions. You can look for a fee-only one at www.napfa.org. With any advisor you consult, ask whether they have any ties to the mortgage industry and will benefit in any way if you get a reverse mortgage.
- Consult with your family, too.
If you're getting -- or even thinking about getting -- a reverse mortgage, it's a good idea to let your family members know about it and to make sure they know how that might affect them.
- Remember that you may have other options, and look into them.
There are often other income-producing options you might look into, besides reverse mortgages. Consider dividend-paying stocks, for example, or annuities, or perhaps a home equity loan. Remember that Social Security will offer some income in retirement, too, but the average annual benefit was recently only about $16,000.
A reverse mortgage might provide welcome income in retirement, but it's not necessarily your best bet. Think the decision through thoroughly.