Reverse mortgages are still not perfect solutions for providing money to retirees, but they do have their merits and they can serve some people well -- especially those who find themselves with significantly underfunded accounts as their golden years approach. First, let's review what reverse mortgages are. Then we'll go over their pros, their cons, and the recent reforms.
In a nutshell
Getting a reverse mortgage will seem a lot like selling your home to a lender in exchange for money -- in the form of either monthly fixed payments, a line of credit, a combination of those two, or a lump sum -- while also being able to keep living there for as long as you can. It's technically a loan, though, that doesn't have to be repaid until you die, sell the home, or stop living in it (perhaps because you moved to a nursing home). At that time, the home can be sold to cover the debt -- or your heirs can pay it off and keep the property.
Reverse mortgage pros
Why would you get a reverse mortgage? Primarily for money. A reverse mortgage gives you an income stream that can be very welcome in retirement, or a significant lump-sum payment. For those among the millions of Americans underprepared financially for retirement, that can be a major attraction.
On top of that, because a reverse mortgage is a loan, the payments made to you aren't technically income, so they're tax-free, another big plus. And one more thing: Whereas some retirement-funding solutions require you to sell and downsize your home or even to move to a less costly region, reverse mortgages let you stay in your home.
Reverse mortgage cons
It might seem like a no-brainer decision at this point, but hang on to your brain. There are some drawbacks to a reverse mortgage to consider:
- You may not qualify for one. Many people do, though -- especially if they're 62 or older and own their homes entirely or owe very little on them.
- A reverse mortgage may not offer you as much money as you'd hoped for. The amount you can borrow depends on a bunch of factors, such as how much longer you (and your spouse, if you have one) are expected to live, the value of the home, the equity you have in it, and prevailing interest rates. Interest charges are added to the balance of the loan over time.
- There are closing costs, just as with regular mortgages, and they tend to be higher. The applicable interest rates tend to be higher, as well.
- While living in your home with the money you received from the reverse mortgage, you'll still be responsible for expenses such as property taxes, home insurance, home repairs and maintenance.
- Once you leave your home, it will likely need to be sold to pay off the reverse mortgage. If you'd hoped to leave it to your children, you won't be able to do so unless the debt can be paid off in some other way.
- Receiving income from a reverse mortgage might hurt your eligibility for various benefits, such as Medicaid and Supplemental Security Income.
So what has changed for the better with reverse mortgages? Well, whereas those who got them used to be able to take out 100% of the available proceeds all at once, at the beginning, most people are limited to taking out no more than 60% in the first year. This can help prevent some people from spending too much, too soon, and ending up in potentially worse financial shape.
The qualification process has also gotten more stringent, with lenders now required to take a closer look at borrowers' financial conditions, assessing their income, credit history, and other factors, to determine how well they're likely to manage with a reverse mortgage. Protections for spouses have also been made stronger, to reduce the chance of surviving spouses defaulting and facing foreclosure.
If you decide you're interested in a reverse mortgage, there's more to learn about them. Be wary of aggressive reverse-mortgage sales pitches from salespeople who aren't looking out for your best interests.
What to do
As you consider a reverse mortgage's pros and cons, consider alternative ways to get income, too, such as dividend-paying stocks, annuities, or perhaps a home equity loan. Remember that Social Security will provide you with some income in retirement, too, but the average annual benefit was recently only about $16,000.
When it comes to retirement planning, it's often smart to consult a financial advisor or two, to explore all your options and make informed decisions. You can look for a fee-only advisor at www.napfa.org.
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