A reverse mortgage can be an important financial tool for seniors concerned that they may not have enough money available to them for retirement. With a reverse mortgage, older homeowners are able to convert part of the equity in their homes into cash, yet still maintain ownership of property. These funds can then be used tax free to either pay off debt and unexpected expenses or supplement monthly income.
But, though this relatively new form of financing may sound tempting, it is certainly not for everyone. Reverse mortgages come with many risks. Those who jump in too quickly can end up running out of money early on in their retirement, have no equity to fall back on nor give over to their heirs, and in some cases, they can even lose their property.
As the name implies, reverse mortgages are a kind of home loan turned upside down. Unlike traditional mortgages, the homeowner is not the one making payments and growing equity.
Instead, the lender sends money to the borrower either through a lump sum, monthly installment, or a line of credit, while the owner’s equity in the home shrinks accordingly.
The balance on the loan does not have to be repaid until the borrower either passes away, sells the property, or permanently moves out.
The amount the homeowner will be eligible for is based on several factors, such as the value of the property, the age of the borrower, and the current interest rates.
To qualify, homeowners have to be at least 62, own their home completely or carry a mortgage balance that can be paid off by the new loan.
The greatest benefit reverse mortgages bring to retirees is financial peace of mind. Here is a rundown of some additional benefits reverse mortgages offer retirees:
Perhaps one of the biggest problems with these products is that they are not so well understood. On one hand, some home owners may simply avoid these complex real estate products due to the many misconceptions that surround them. On the other hand, eligible retirees may jump in too quickly without fully considering how the loan will really affect them and their assets.
Here is a breakdown of the most significant cons of reverse mortgages:
The key takeaway about reverse mortgages is that they have the potential to be a lifeline for some seniors in need of extra cash, but with few options to get the money they need. Yet, these products must be approached carefully.
Any seniors considering a reverse mortgage should consult a qualified financial advisor before making any commitments, since the long-term risks could outweigh any short-term benefits.