Taking out a reverse mortgage to tap into your home equity is not a decision to be taken lightly. As a retiree (or a soon-to-be retiree), you may not have as many cash reserves as you would like, but that does not mean this type of loan is the best way to get the money you need.
It’s understandable that you want to access the home equity you’ve worked hard to accumulate, but be forewarned that reverse mortgages are more complex than other types of home loans, with many pros and cons. It could be a more expensive option and you could end up spending a lot of the equity you’ve earned on interest and fees.
Before applying for a reverse mortgage, think through the following questions to help you decide whether it’s a good idea in your situation.
How Long Are You Planning on Staying in Your Home?
If you plan on staying in your home long-term, then a reverse mortgage may be more worthwhile. That’s because reverse mortgages can have some hefty upfront costs. Depending on the lender, you may pay origination fees and upfront mortgage insurance, which can be up to a few thousand dollars plus 0.5% to 0.25% of your home’s value. Other costs you’ll need to pay include a home appraisal, title insurance, a home inspection and other closing costs.
If you do move, you will need to pay the loan back and you won’t get a refund on these upfront costs. Even if you don’t plan to move, consider your current health situation and whether you may be forced to move into a nursing home or to be closer to family to help with your medical needs.
Remember, the loan is due once you sell your property or the primary resident(s) moves out. You typically get a six month window to repay your loan. Sure, you may make some money back after selling the property and repaying the loan, but you may have profited more if you didn’t pay the costs associated with originating a reverse mortgage.
All this is to say that you may be losing out on a significant amount of money if you move out of your home quickly. It’s probably not a good idea to pay the upfront costs of a reverse mortgage unless you plan on keeping your home for a long time.
What is Your Income Like During Retirement?
One of the keys to a successful reverse mortgage is that you must maintain your home. That means making repairs, replacing things that break, and staying up to date on property taxes and insurance.
Those who have a fairly healthy income stream will likely be able to meet these terms of a reverse mortgage. If you don’t expect to have much income, or believe that you won’t be able to maintain your home and pay property taxes and insurance, then you may want to reconsider whether it is a good idea to do a reverse mortgage.
With a reverse mortgage, if you fall behind on property tax or insurance payments there may be a lien placed on your home and you could face foreclosure. In a worst-case scenario, the lender could require you to pay back the loan and you could be forced to move out.
When looking at reverse mortgage options, look at the payments and whether you will have enough money to cover all the costs of homeownership. If not, you may want to consider other options.
Does Your Spouse Plan on Staying if You Pass Away?
It is crucial to go over all options with your spouse, especially if he or she plans on staying in the home. If your spouse is not yet 62 years old, then they will not qualify as a co-borrower under most reverse mortgage agreements.
In that case, your spouse may be allowed to stay in the home if you pass away, but only if he or she is eligible. However, if you are forced to move to a nursing home or elsewhere, then your spouse will not be able to stay in the home. This may occur if your health declines or you need to be closer to family.
If your spouse is 62 years old or older, then he or she can be listed as a co-borrower. If one of you dies or no longer resides on the property, the remaining spouse can keep living there and continue to receive money from a reverse mortgage.
If your spouse doesn’t qualify as a borrower and plans to stay in the home, you’ll need to come up with a plan for them in case you’re no longer in the home.
Do You Want to Leave Your Home to Any Heirs?
If you don’t have children or do not plan on leaving your home to any heirs, then a reverse mortgage can allow you to spend the equity you’ve earned now. Whenever you pass away in the future, your reverse mortgage loan would become due. Lenders will take their portion of the proceeds from the sale of the home.
If you do have family or heirs that may want to use the home or the proceeds from its sale, they may have the opportunity to pay the reverse mortgage back and claim the title to the property. However, this may not always be financially feasible if they do not have sufficient cash available or cannot qualify for a loan to buy the home. If you do plan on leaving your home to an heir, then a reverse mortgage will likely make it more complicated for someone to inherit it.
A reverse mortgage may be a good idea in some cases, but there are other alternatives that may be a better option for some people. For example, taking out a personal loan or selling your home outright and downsizing may be a better option. Also, companies like Unison can allow you to tap into your home’s equity without interest charges. With the Unison HomeOwner program, the company invests alongside you in the home. In exchange, they receive a share of any future change in the home’s value. There are no monthly payments or interest charges and you do not need to pay the money back for up to 30 years or until you sell the home.
As with any financial program, it’s important to research every aspect and ask questions to understand if it will benefit you in the long run.
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