If you’re deep into your retirement and running out of money, you don’t have many options. Going back to work can be difficult or even impossible, and you may not have access to other income streams. In a situation like this, it might make sense to consider a reverse mortgage. Here are the pros and cons of reverse mortgages.
“If you own your home, need the income, and have no other way of obtaining it, a reverse mortgage can be a lifesaver,” says Karla Allen, a writer for AYPORealEstate.com.
Before you consider one, however, it’s important that you know the pros and cons of reverse mortgages. Here’s what you need to know.
What is a reverse mortgage?
A reverse mortgage is a specialized home loan designed for people age 62 and older who have considerable equity in their home. Through this loan, you can convert some of your home’s equity into cash without taking on a home equity loan or line of credit.
In a sense, this makes the loan effectively the opposite of a mortgage loan because the lender pays you a monthly payment instead of the other way around.
It can be an adjustable-rate or fixed-rate loan, and the monthly payment amount you receive is based on how much equity you have in the home. You’ll get a much better deal if your home is paid off than if you still have a traditional mortgage loan.
Here is a list of the benefits and the drawbacks to consider before selecting a reverse mortgage
- You stay in the home
- Your heirs aren’t on the hook
- It’s a safe payment
- It can be expensive
- You could lose your home
- You’ll deplete your equity
3 pros of reverse mortgages
Reverse mortgages aren’t for everyone, but there are some good reasons to consider one.
1. You stay in the home
The last thing you want to do in retirement is jeopardize your quality of life. That can happen, though, if you can’t manage to solve your money issues. With a reverse mortgage, you get to remain in your home and receive a monthly payment.
The loan does not have to be repaid until the homeowner no longer lives in the home,”
“The loan does not have to be repaid until the homeowner no longer lives in the home,” says Allen. “This can be an extremely beneficial arrangement for retirees who plan to live in their homes for some time.”
What’s more, if your spouse is kon the loan, they can also remain in the house for as long as they remain alive.
2. Your heirs aren’t on the hook
When you and your spouse die, the lender can collect payment for the loan. Your heirs will be responsible for selling the home and paying off the loan.
But here’s the kicker. The lender cannot collect more than the value of the home. This means that the lender can’t go after your loved ones if the value of the property isn’t enough to satisfy what you owed.
3. It’s a safe payment
Your retirement savings balance can fluctuate, depending on which way the financial markets swing. But with most types of reverse mortgage loans, you can plan on receiving fixed payment every month, even during a recession.
In fact, it can be a good idea to use funds from a reverse mortgage during a downturn in the economy instead of withdrawing cash from your depleted investment account.
3 cons of reverse mortgages
So far, reverse mortgages sound like a good idea, so what is the downside of getting one? Here are a few to consider:
1. It can be expensive
If you’re considering a reverse mortgage loan because your retirement funds are limited, you may be dismayed to find out that getting one isn’t cheap.
In addition to third-party closing costs, origination fees, and a loan servicing fee, you could also be required to pay mortgage insurance to protect the lender in case the loan goes into default.
2. You could lose your home
This might sound odd, considering you’re not the one making monthly mortgage payments. But lenders require you to continue paying your property taxes and homeowners insurance. If you stop, the lender has the right to repossess your home.
What’s more, you can’t allow the home to fall into disrepair, which will impact its value. And if you enter a nursing home or assisted living center for more than a year, the loan could become due, which might require you to sell the house.
If you have children or grandchildren you want to leave an inheritance to”
3. You’ll deplete your equity
The more monthly payments you receive, the more equity value you lose in your home. This may not be a problem for many people, but it could be a concern if you want to preserve your equity.
“If you have children or grandchildren you want to leave an inheritance to,” says Allen, “a reverse mortgage will cut into that.”
And if you plan on selling the home at some point in the future to boost your retirement funds, a reverse mortgage will reduce what you’ll end up with from the sale.
Learn more about reverse mortgages by reading our in-depth review of American Advisors Group.
Should you get a reverse mortgage?
Now that we’ve discussed both the pros and cons of reverse mortgages, it’s important to consider your situation before you decide to get one.
If your retirement income is dwindling and you can stomach the drawbacks, a reverse mortgage can stave off some of the bigger problems you might encounter if you run out of money.
But it’s critical to consider what you and your heirs might lose if you get a reverse mortgage, especially if you have other options to resolve your money issues.
If you’re considering getting a reverse mortgage, compare SuperMoney’s top picks to see which ones offer the best combination of fees, rates, and payouts. And if you decide to get one, do your heirs a favor and let them know how it might affect them.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.