If you’re age 62 or older, and you’re in need of some financial stability, a reverse mortgage could be for you. However, these loans are commonly used for individuals who are retired or are on a fixed income and are having trouble making ends meet. It’s also a good way to ensure that you are able to keep your primary residence as long as possible. However, it should be used as a last resort, not necessarily as supplementary income, since you will be responsible for paying back the loan. Let’s take a deeper look into all of the pros and cons of obtaining a reverse mortgage.
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Pros of Getting a Reverse Mortgage
When you choose to take out a reverse mortgage, you’re usually looking at a scenario in which you don’t have to pay taxes on your loan. This is because you’re pulling from equity that you’ve already paid over years of owning your home. Likewise, using the equity from your home as a loan means that you don’t have to make monthly payments on the loan, instead the bank is paying you each month (or possibly in a lump sum).
Depending on how much you need, a reverse mortgage may actually end up being cheaper than a traditional loan. When you take out a credit card loan or personal loan, many banks will charge a huge amount of fees and interest. With a reverse mortgage, your fees will likely be much lower. In addition, the type of loan you receive is usually quite flexible. You can make an agreement with your lender about how much you need, what you need it for, and what your maximum should be. You can take out a large loan to cover all of your financial needs, up to the total cost of your home.
What’s more, as we talked about, the bank will pay you each month, which means you can potentially pay off the remainder of your mortgage with your loan. For someone who’s retired, this can free up a large chunk of monthly funds that can be used on other expenses. It also does not affect your ability to qualify for social security benefits or medicare. Lastly, taking out this loan protects your ownership of this home. The loan requires that you (and any co-owners) live in the home as your primary residence. It also does not change your ownership status. A reverse mortgage only pays you back equity on your home, the bank does not own your home. As such, any heirs of your property will still gain the home if you should pass away.
Cons of Getting a Reverse Mortgage
Just as we talked about the fact that you don’t have to pay taxes on your loan earlier, on the flip side, you’re still responsible for maintaining your home. That includes paying any applicable property taxes, utility costs, and homeowners insurance. Depending on how much of a loan you’re looking for, you may find that accrued interest and fees could end up costing more in the end than other types of loans.
In addition, you’re loaning out your paid equity to yourself, which means that your leftover equity will be significantly diminished (and possibly non-existent at some point). This will affect any inheritance attached to the home that could have potentially been attained by yourself, or passed on to your family.
Another factor that depends on the total amount of your reverse loan, has to do with outliving your loan. It’s possible that you could use the entirety of your built up equity, which will have to be paid back. This would mean that you cannot will the property to anyone unless you or your heirs repay the loan first.
As we mentioned earlier, if you or your co-borrower on the property move out for any reason you will still need to pay back the loan. If the home is sold, you will still need to pay back your loan as well. Finally, in many government programs, a reverse mortgage is not seen as a source of income for retired individuals. However, other programs, like medicaid, your reverse mortgage may very well be assessed as steady income and it could affect your ability to qualify.
Alternatives to a Reverse Mortgage
As we mentioned, obtaining a reverse mortgage isn’t always the best idea if you already have a steady source of income. It’s mainly used as a last ditch effort for those who have no other options and are afraid of losing their primary residence. Or for those who simply have no other, or very little, means of financial assistance. However, before you decide on a reverse mortgage here are some examples of other financial avenues that may be useful to you.
HELOC
Home equity lines of credit offer you an advance of cash whenever you may need it. Many individuals take out a HELOC as a second mortgage on their home if they are struggling to cover their homeowner costs. In traditional home loan, your loan goes into effect when you close on a home, but with a HELOC, the lender gives you the funds up front, before you have paid it off. You still close on the home as usual, but you’ll have a draw period in which you can take funds from the loan and use them as you see fit. However, that time period will end and you’ll still be responsible for paying it back.
Home Equity Loan
These are loans that use your home as collateral in order to secure you with a large loan. You can usually only qualify for these loans if you already have a fair amount of equity accrued on your property, because the lender uses your home as insurance. If for some reason you can’t pay back the loan, your home can be seized to cover the costs of the equity loan. Banks dealing in home equity loans will assess the value of your home and will let you borrow money lesser than or possibly equal to the total value of your property.
Refinancing Existing Mortgage
After you’ve had your loan for some time, you can talk with you lender about renegotiating the terms of your mortgage. If a few years have passed and you feel that your monthly payments are too big, talk to your bank about what options they have for refinancing. Essentially, you’re reopening you current mortgage and you may try to have the interest rates lowered, the term of your mortgage, or other areas. For example, if you’ve owned your home for 10 years, and you’ve agreed to a 30 year mortgage, you might ask your bank to extend the life of your mortgage so that the total sum isn’t due in 20 years. This will extend the term of your loan and will make your monthly payment lower from here on out.
Conventional Loan
We talked earlier about traditional loans, which come in many forms. For some people, they may feel that they just need a set amount of funds in order to get by. If you fall into the category, simply obtaining a credit card or small personal loan might cover the cost of what you need. This could be a better option for you instead of taking out a loan equalling the total cost of your property. The sheer amount of interest you’d need to pay back could exceed the total amount that you needed in the first place. So, if you just need a small loan, it might be a good idea to shop around for conventional loans instead.
Apply for Assistance
If you’re struggling to keep up with all of your monthly costs, you can always look into assistance programs that have specifically been designed to help individuals in your situation. Of course, you may already have a retirement plan in place to give you some monthly income, but if that’s not enough there are several ways that you can get some monthly help.
For individuals in low-income housing situations, you may be able to get assistance lowering your monthly energy costs by applying for programs that help to weatherize and turn your residence into a more energy efficient one.
In addition, if you are living with a disability, you may qualify for disability assistance on top of any social security retirement payments you’re receiving. There are also several low-income assistance options that can cover the cost of food, healthcare, housing, and more. Lastly, in most states there are several options for property tax relief. Veteran status, age, and region will all make a difference on what property tax relief programs you can apply to and what level of support you may qualify for.
Downsizing or Relocating
It might be in your best interest, if you prefer not to take out a loan and accrue debt, to consider downsizing to a smaller residence. Selling your property and using your equity to purchase a smaller home, with a lower monthly payment, is always an option. If you’ve lived in your home for years, you have likely paid off a large portion of your mortgage. This means, if you sell your home and find a smaller option, you have the ability to put a large down payment on your new home given the amount of equity you have accrued. This equates to a much more manageable monthly payment.
Although, you don’t have to purchase a home this way. Simply selling your home and buying a smaller option will also likely give you a smaller monthly payment, even without a sizable down payment. It all depends on your specific situation.
Renting or Homesharing
If your mortgage is simply too expensive for you, but you don’t want to have to be responsible for paying back a reverse mortgage, you can opt to rent a cheaper property for a lower monthly cost.
There are also homesharing initiatives and programs that cater to individuals of retirement age. They can help you find quality, but affordable living options that don’t require a loan.
As you can see there is quite a lot to consider when you’re thinking about signing up for a reverse mortgage. Before you do, it’s very important to consider some of the alternatives that we have provided for you. Reverse mortgages can be expensive and risky if you’re not informed about all of the terms within the loan. As such, you may find that this type of loan might not be the right choice for you.
If that’s the case, don’t panic, there are so many other options that can help you obtain some extra monthly income if you truly need it. However, for those who are 62 and over, you may find that the terms of a reverse mortgage fit right into your financial plans. It’s crucial to do research and confirm that a reverse mortgage is for you before you apply.
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