After retirement, without regular income, seniors may struggle with their finances, but that’s not necessarily incentive to find another job. You can solve this problem with a reverse mortgage, which allows borrowers over the age of 62 to tap into their home equity. You can then take out this loan as a lump-sum advance, periodic advances or a line of credit.
Unlike the home equity loan, you don’t have to make payments as you borrow with this new loan. Typically, repayment occurs upon the sale of your home.
It is generally expected, though, that you’ve already finished paying off your regular mortgage by the time you apply. And, if you haven’t, then you may have to use the proceeds from the reverse mortgage to pay what you owe.
The following homes are eligible:
- 2-4 unit homes
- Modular homes
- Planned unit development (PUD)
- Some manufactured homes
All this being said, a reverse mortgage isn’t for everyone, because the consequences are serious if you don’t plan properly.
Robert Nesbitt, the vice president of BMO Harris Bank in Winnetka, IL, said that reverse mortgages are often not a great idea. “You’re susceptible to those crisis situations where you can’t get more money out of it.”
There are fluctuations in the real estate market, which might force you into a short sale. And if you tend to live beyond your means when you have a sudden influx of cash, then a reverse mortgage may rob you of your home.
So, before we detail the advantages, we offer another word of caution, simply because this loan is dangerous if not done right.
Who should not take out a reverse mortgage?
If the following scenarios are true of you, then you should not take out a reverse mortgage:
- Your heirs’ financial situation: Most critically, if your heir cannot or will not pay back your reverse mortgage, then it is not a good idea to apply. This is especially true if that heir would have nowhere else to go upon your death, be it your spouse or your child: in order to keep the home, they must pay any remaining balance. Otherwise, they face foreclosure.
- Plans to move: Likewise, anyone who may move out in the next few years should not apply—this loan is for those who have settled down.
- Paying taxes and maintenance: If you’re still unable to afford your property taxes and maintenance costs, or whatever it is you’re trying to finance with the reverse mortgage, it’s probably not worth it.
- Low equity: A reverse mortgage can be prohibitively expensive if your equity isn’t high enough. The greater your equity, the lower the rates.
If you receive and depend on help from certain government-aid programs, a reverse mortgage may affect your eligibility. Similarly, if you use your reverse mortgage to boost your checking and savings accounts beyond a certain limit, then you may lose government benefits.
Who should take out a reverse mortgage?
A reverse mortgage is only a good idea, Nesbitt said, when you have a contingency plan. If you have a clear budget and a clear plan for sale of the home and move-out—whether it be to a retirement home or your child’s house—then a reverse mortgage can work.
The same is true if you expect you don’t have much time left.
Finally, for the lucky few, “if you are really house-rich [with a great deal of equity] and you don’t have much else, and you’re not going to destroy all the equity in the home,” then a reverse mortgage can be sensible.
Got the basics? Then here are 3 more reasons to take out a reverse mortgage:
- If you need some extra dough for property taxes, home insurance, maintenance or whatever else, a reverse mortgage may work.
- The older you are and the greater your equity, the more advantageous this loan can be. Your chance for approval is higher, and, best of all, you stand to get significantly lower interest rates.
- This is especially true if your real estate market is healthy. If you can reasonably expect that your home will sell at the price you think it deserves, then the sale can make up for whatever balance you incur with the reverse mortgage.
As you look at reverse mortgages with a lender, know that, typically, the lump sum will carry the highest interest rates, periodic advances the least and a line of credit will fall in-between. The reason: In the eyes of the bank, the lump sum and line of credit offer the greatest flexibility to consumers. With a line of credit, for example, you might take out just a few hundred dollars, and the bank doesn’t stand to make much off of the deal. Hence the higher rates.
Once you do take out the loan, your responsibilities, generally, are minimal. Repayment aside, all you have to do is meet a few simple obligations: maintain this home as your primary residence, don’t let your home fall into disrepair and pay all property taxes, insurance and assessments.