Reverse mortgages are a way for retirees to release part of their home equity in the form of either a monthly payment, cash lump sum, line of revolving credit, or a combination of all three. These mortgage products have grown in popularity since their creation and now over 600,000 loans are outstanding moment. Although a reverse mortgage may seem like the ideal solution for anyone looking to release some capital from their house and fund their retirement, there are still some significant risks that you should fully understand before you buy. Before we delve into some of these unexplored risks, it is worth recapping just how reverse mortgages work as well as their benefits and how they are helping hundreds of thousands of retirees finance a comfortable retirement.
Many homeowners aim to have their mortgage paid off by the time that they retire so that their outgoings are significantly reduced and they have more cash to spend. Although this makes complete sense from a financial planning point of view, some retired homeowners find that they are actually asset rich and cash poor which means they have little spare capacity for enjoying their retirement. This is why decades ago a financial product was launched that meant that those over 62 years of age who own a significant percentage of their home (over 30%) could release some of that equity to find their retirement.
There are currently about 70,000 reverse mortgages issued every year even though only 2-3% of eligible American homeowners are estimated to be eligible. One of the main reasons for this is that there is a significant feel associated with reverse mortgages that means that such a product is only suited for those who plan on living in their home for a long time. If you borrow a small amount over a short time horizon then your fees as a proportion of your loan total will be high upon closure. Having said that, if you borrow over a long period of time then these fees (although often high) can be rolled into the cost of the reverse mortgage and so can be paid back upon closure.
One of the reasons that reverse mortgages are so popular is that they are nontaxable and also don’t impact your Medicare or social security benefits. You also retain ownership of your home until the point of closure and also because there are no monthly fees to pay monthly on the actual loan principle then retirees are free to spend their cash on things other than debt servicing.
How much you can borrow for a reverse mortgage depends upon several eligibility factors. In general, the older that you are, the higher the amount of equity you own in your home, and the smaller the amount that you actually still owe on the property, the greater the amount that you will be able to borrow.
One of the best ways to use a reverse mortgage is if your current property has been appreciated. Instead of taking out a loan secured against the new value of your home, you can use a reverse mortgage to release that equity in a controlled manner to help pay for things like home-based care, home repairs/improvements, or health costs depending on your needs and the financial product that you opt for. Single-purpose home reverse mortgages are mortgages that have one purpose specified by the lender and as such, they are usually the cheapest options as they pose less risk for the lender. They are not provided by many banks but are a good way of releasing the capital tied up in your house if you know that you need cash for a specific purpose only.
There are however some significant risks to reverse mortgages that you should be aware of. Most providers will require you to keep your home in good repair, pay your property taxes and purchase home insurance. If you fail to keep to the terms of their lending then this may force early closure of your agreement and you may be forced to pay back the value of the loan, plus interest and fees much sooner than you anticipated. For most people, this would require selling the property in question and trying to find a smaller house after the reverse mortgage has been paid off.
If you would like any more information on reverse mortgages then the FTC.gov internet portal has a wide range of resources aimed at clarifying the different types of reverse mortgages as well as the benefits and risk factors involved. If you would like more information regarding home insurance, then over 50’s specialist Castle Cover was able to help me find the home insurance that catered to my needs.