Reverse Mortgages: Do They Make Sense For You?

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One of the most common fears among the aging population is outliving retirement savings. The skyrocketing cost of modern living combined with the technology-driven advancements in modern medicine means that lots of retirees that live far beyond their retirement age eventually end up in a tight financial situation.

However, reverse mortgages are one financial product that is intended to solve the problem of outliving retirement savings. A reverse mortgage is a loan a homeowner can take out against the value of their home while retaining the title and continuing to live there. The homeowner can receive a lump sum or fixed payments and his or her equity in the home decreases as payments are received.

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However, with a reverse mortgage, the homeowner is under no obligation to make repayments against the loan during their lifetime. Once the homeowner dies, the home is typically sold and the lender recovers the amount they are owed from the proceeds.

Is a reverse mortgage the perfect way to supplement dwindling retirement savings? Here’s a look at some of the pros and cons of reverse mortgages.

Pros

  • Reverse mortgages can serve as a supplemental income source when a fixed payment option is chosen. Many retirees don’t have a substantive pension income stream, and a reverse mortgage payment can make a huge difference when it comes to standard of living.
  • The income from a reverse mortgage is typically considered a loan, which means there is no tax on the proceeds. However, everyone considering a reverse mortgage should first consult a tax expert to discuss the specifics of the situation.
  • You won’t end up underwater. While it is possible for the value of your home to fall below the amount of the reverse mortgage, FTC guidelines specifically state a homeowner will never owe the reverse mortgage lender more than the current value of the home.
  • Your beneficiaries get to keep the change. After your death, your home will be sold to repay the reverse mortgage, but any remaining proceeds beyond what is owed on the mortgage will go to your family or other beneficiaries.

Cons

  • Like any other financial service, banks and other reverse mortgage lenders are not running a charity. Fees and interest will eat into your home’s equity value throughout the duration of the reverse mortgage.
  • In addition to fees and interest, the homeowner is also responsible for three critical financial obligations when it comes to the house: property taxes, homeowner’s insurance and necessary home repairs. The homeowner remains responsible for these payments as long as they continue living in the home.
  • If a homeowner fails to meet any of the three requirements listed above, the lender has the right to demand immediate repayment of the full amount of the reverse mortgage, which could put the homeowner at risk of a foreclosure.
  • Your home equity will be reduced by the amount of the reverse mortgage. That means, if you spend the proceeds, your beneficiaries’ inheritance could take a big hit.

The Bottom Line

So, is a reverse mortgage right for you? Like any other financial decision, the answer depends on a range of factors, including the terms of the mortgage and the goals and expectations of the borrower.

And if you’re interested in learning more about the home-buying process, click here.

Regardless of your ultimate decision, the most important part of the process is education.

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By Quizzle. Helping You Make Better Financial Decisions.