Reverse Mortgages Are Becoming More Popular Than Ever. Should You Get One?
- For many seniors, a reverse mortgage is a great way to use home equity as a cash source.
- These products have their benefits and drawbacks, so it's important to know what you're signing up for.
Is a reverse mortgage the right choice for you? Here's how to know.
Many seniors struggle in retirement once they move over to a fixed income that consists largely of Social Security. If you're in that boat, you may be considering a reverse mortgage.
Steve Irwin, President of the National Reverse Mortgage Lenders Association, reports that these loan products are becoming increasingly popular. "We saw a 34% year-over-year increase in reverse mortgage volume to over 43,000 loans in 2020," he says, "and we anticipate a similar increase in production in 2021."
But is a reverse mortgage right for you? Here's how to know.
What is a reverse mortgage, anyway?
If you're a fan of daytime TV, you've probably seen your fair share of ads for reverse mortgages. But if you're still in the dark about how they work, worry not.
A traditional mortgage allows you to borrow money to buy a home, and so you pay a lender every month. With a reverse mortgage, the opposite happens. A lender pays you a sum of money every month, and you can use that money for any purpose, whether it's to pay your property tax bills, keep up with home maintenance, or cover bills not related to housing.
There are certain requirements you'll need to meet to qualify for a reverse mortgage, like being at least 62 years old and applying for a home that's used as your primary residence. You'll also need to stay current on your property taxes, homeowners insurance premiums, and any other ongoing expenses you're responsible for, like HOA fees.
Now you may be wondering why a lender would be willing to give you a reverse mortgage if you're retired and don't have an income. The answer is that a reverse mortgage is secured by your home itself, and if you have a lot of equity in that home, that protects your lender.
It's often the case that seniors own their homes mortgage free by retirement, or at least have a lot of home equity at that point. If that's your situation, and your home is worth $300,000, your lender can rest assured that it can be repaid that amount by selling your home if need be.
What's the upside?
A reverse mortgage allows you to use your home equity as a cash source without having to actually sell it. As Irwin explains, "American retirees...have cited outliving their savings and investments as one of their greatest retirement fears." A reverse mortgage could help alleviate these concerns. And seeing as how Americans are now sitting on more home equity than ever, it may be a good time to consider tapping it.
Plus, the proceeds from a reverse mortgage are generally yours to enjoy tax free. Many other senior income sources, like traditional IRA or 401(k) withdrawals, aren't. And even Social Security benefits can be taxed under certain circumstances.
What's the downside?
A reverse mortgage, like a regular mortgage, is a loan -- one that's secured by a specific asset (your home) and comes with specific terms. If you fail to keep up with your property taxes or homeowners insurance payments, negative consequences could ensue -- namely, you could face foreclosure, which may require you to sell your home.
Furthermore, some reverse mortgage products come with high fees. You'll need to shop around before settling on an offer, and even then, you may still find that you're charged quite a bit.
Finally, a reverse mortgage could make it so you're unable to pass your home along to your heirs. Your reverse mortgage will need to be repaid eventually. If you pass away, your heirs may need to sell your home to cover your loan balance. The loan balance comes due when the homeowner dies, moves away, or sells the home.
Should you consider a reverse mortgage?
As Irwin puts it, "As America’s population ages, reverse mortgages have become an increasingly critical option to pay for future healthcare needs, cover daily living expenses, and to be used strategically as part of a comprehensive retirement plan." If you're struggling to keep up with your housing costs or general bills, a reverse mortgage could be a good solution -- as long as you do your research and understand what you're signing up for.
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