For the past decade, reverse mortgages have been a buzz term in the conversation about retirement. TV commercials starring familiar actors have been touting the benefits of such loans. Lenders have been calling these loans the key to retirement. While it sounds promising for many people planning retirement, homeowners aren’t sure what exactly a reverse mortgage is and how it can make their retirement stress-free.
What is a reverse mortgage?
A reverse mortgage is a loan product that allows the borrower to access the equity in their home. It differs from a conventional refinance because it does not require monthly payments to be made. These loans can either be fixed or adjustable rate. Not all borrowers can apply for the loan, however. A borrower must be at least 62 years old and the property they are attempting to mortgage must be their primary residence. The mortgage underwriter determines the amount of equity the borrower can access, after all outstanding liens on the house are paid off. The loan becomes due for repayment should the borrower pass away, sell the property, or move out of the property for more than a year.
How can a reverse mortgage help with my retirement?
Borrowers don’t need an income to qualify for the loan which has obvious appeal to retirees. There are several different ways to structure a reverse mortgage including a lump sum at closing, a scheduled monthly payment for a term or the tenure of the borrower’s life, or a line of credit. Since every person’s situation is different these options allow the borrower to tailor the loan to their needs. It’s an easy way to liquidate the equity in their home to use however they’d like. Reverse mortgages also allow borrowers to remain in the homes they’ve owned for years.
What’s the catch?
A reverse mortgage isn’t for everyone over the age of 62. Financial advisers recommend that reverse mortgage applicants have exhausted all of their other assets before applying. Reverse mortgages are more expensive than traditional mortgages; there are associated origination fees, servicing fees, mortgage insurance, and closing costs. Borrowers will also still be responsible for homeowners’ insurance and property taxes. Borrowers should also be aware that their heirs will need to pay back the entire amount of the loan plus the interest accrued or else forfeit the home to the bank upon the death of the borrower(s).
As with every financial decision, you should consideration all of your options and the pros and cons for each. We also recommend that you contact a financial advisor or attorney well versed in reverse mortgages before you finalize any mortgage.