Reverse mortgages are loans — a type of home equity loan.
You are borrowing your own home equity while retaining home ownership. However, unlike a traditional home equity loan, there are no monthly mortgage payments. The money you borrow and interest accumulated is repaid when you no longer reside in the home.
If you qualify, reverse mortgages enable you to:
- Pay off your existing mortgage and eliminate ongoing monthly loan payments. (This can dramatically improve your day to day budgeting.)
- Access cash or a line of credit to be used however you like.
- Lock in the current value of your home equity — limiting downside while still accessing upside potential.
- Increase your financial options in life.
Reverse mortgages CAN be a really great way to increase your financial options. In fact, according to a recent survey by Ohio State University, the vast majority of people who are able to secure these loans are very happy with their decision.
Other studies suggest that more than 90 percent of all households who have secured a reverse mortgage are extremely happy that they got the loan. People say that they have less stress and feel freer to live the life they want.
However, there are times when a reverse mortgage is a really terrible idea. Here are few instances of reverse mortgage mistakes — times when getting a reverse mortgage might be a colossally bad idea:
- Beware if You are Eligible for Low-Income Assistance: If you are currently or will be eligible to receive low-income assistance from the Federal or State government (like Medicaid), you will want to be careful that proceeds from a reverse mortgage does not disqualify you from that assistance. (NOTE: Social Security and Medicare are not impacted by a reverse mortgage.)
- Reconsider if You Are Planning to Move in the Near Term: Since a Reverse Home Mortgage loan is due if your home is no longer your primary residence and the up front closing costs are typically higher than other loans, it is not a good tool for those that plan to move soon to another residence.
Reverse mortgages can be great when you hope to remain in your home for as long as possible.
- Evaluate if You are Willing to Reduce Your Heirs Inheritance: Many people dismiss a reverse mortgage as a retirement option because they want to be sure their home goes to their heirs. And it is true, a Reverse Mortgage decreases your home equity – affecting your estate.
However, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it. There are numerous potential Estate and Retirement Planning benefits to a Reverse Mortgage – see Innovative Uses of a Reverse Mortgage for more information on these options.
- Think About the Long Term: While reverse mortgages can quickly improve your immediate financial situation, it is important to consider the long term implications of these loans.
When you apply for a reverse mortgage, you are required to undergo a financial counseling session. The counselor will help you assess the long term impact of the loan and make sure that if you get a reverse mortgage, you will be able to afford your existing lifestyle and potential medical costs now and well into the future.
- Accommodate Your Spouse and Other Residents: If you share your home with your spouse or anyone else, you definitely want to assess how a reverse mortgage loan will impact them.
Deciding whether or not a reverse mortgage is right for you can be complicated.
Luckily there are online tools to help you assess the pros and cons of these loans.