When Should You Consider a Reverse Mortgage?

The following is a guest post. Enjoy! 

For millions of American seniors, the very thought of retirement is enough to bring on a sense of panic.  The reason is simple, multiple financial crises and the ever-increasing cost of living have rendered seniors financially vulnerable.

But what can they do? Try as you might, you can’t work forever and there is no guarantee that Social Security will survive the onslaught of millions of Baby Boomers entering retiring.  Given this uncertainty, an increasingly popular retirement planning option is the reverse mortgage.

However, many people are still unfamiliar with reverse mortgages and when to get them.  With that in mind, here are some answers to many of the questions you’ll need to ask when you are considering a reverse mortgage.


1) How do I know if I am eligible?

The eligibility requirements for most reverse mortgages is quite simple.  First, you must be at least 62 years old and then the property must be your primary residence.  While the amount you can borrow will depend on several factors such as your age, the value of your home, and the balance of your current mortgage; in most cases, you can borrow up to $625,500.

Other things that will come up when a lender looks at your eligibility is whether you can continue to pay your homeowner’s insurance property, taxes, and utilities.  In addition, you will need to continue to maintain the property or run the risk of defaulting on the loan.

The best way to check out your eligibility to contact a lender and if you live in California search for lenders here.


2) How Does It Work?

While reverse mortgages are loans, they do not function in the same way as traditional mortgages and home equity loans.  The key difference is that you won’t have to make regular monthly payments.  Instead, the principal and interest due will accrue over time and then the loan will become payable once you no longer live in the home.

In addition, you have two options to consider when taking out a reverse mortgage.  The first is a lump sum payment – this basically means you will get the entire loan amount at closing.  The second is a line of credit and this option has its advantages as the interest accrual is only on the line that you have used.  Another benefit of a line is that the amount available can grow over time as the value of your home appreciates.

You will need to repay the loan when you no longer living in the residence.  As such, one good option is to take out a life insurance policy to cover all or most of the amount due when it comes time to repay the loan.  This will help to protect your heirs from having to repay the bank out of their own pockets.


3) What Does It Cost?

Obviously, the total cost of a reverse mortgage will depend on how much you borrow, the interest rate, and how long the loan accrues.  Another aspect of reverse mortgages is determining the closing costs.  This will include fees from the lender such as origination fees but will also include mortgage insurance, title insurance, state and local fees, and the cost of an appraisal.

In addition, most reverse mortgages are variable rate loans.  As such, you can expect the costs to go up as interest rates increase.

The point here is that you want to look at all the costs when determining the cost of a reverse mortgage as this will help you to decide if this loan is the right fit for your retirement needs.


4) Are There Other Options?

In some cases, a reverse mortgage is not the best option for you.  One option might be to sell your home and then downsize by moving into a smaller home.  The decision to take out a reverse mortgage is not something to be taken lightly and as you can see there are many pros and cons to consider.

When considering a reverse mortgage your best bet is to talk over the option with your family and your adviser.  In the end, the decision is yours but you want to make sure you think through all the options before deciding.

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