Often considered as the last-resort for sourcing funds, the reverse mortgage has been a subject of debate for a long time now. Critics argue that reverse mortgages are risky, complicated, and expensive. However, they have been a popular and useful retirement planning tool for homeowners. If you’re considering a reverse mortgage, here’s everything you should know about it.
What is a reverse mortgage?
This is a type of home equity loan that requires no monthly mortgage payments. Homeowners over 62 years of age are eligible for reverse mortgages. The main feature that sets a reverse mortgage apart from other conventional mortgages is that the borrowers can receive the home’s equity as monthly payments, lump sum or a line of credit. The principal and interest due keep accruing until the house is sold and the loan is repaid. This happens when the homeowner passes away or moves out.
Is a reverse mortgage right for you?
A number of borrowers use a reverse mortgages to eliminate existing mortgage debt and to improve their monthly cash flow. Some opt for it when they have an immediate need to pay off debt, or unexpected expenses such as a health situation. However, this option only makes sense for you if you:
- Can afford home maintenance costs, property taxes, and insurance
- Want to use your home’s equity to supplement your retirement income
- Do not plan to move out of the home
How much can you borrow through a reverse mortgage?
You can get up to 60% of your principal limit in the first year of the reverse mortgage. However, if required, you can take out extra money as well as additional cash of up to 10% of your principal limit. A number of factors determine the amount you are eligible for:
- Your age
- The value of your home
- Interest rate
- The HECM (Home Equity Conversion Mortgages) FHA (Federal Housing Administration) mortgage limit which is $726,525, or your home’s appraised value, whichever is lesser.
What are the pros & cons of a reverse mortgage?
Requires no monthly payments
|Fees and other closing costs are high
Proceeds can help you pay-off an existing mortgage or other debt, or meet unexpected expenses
House maintenance, property taxes, and insurance costs are on you
|Improves monthly cash flow
Drains a key asset of your estate
Studies show that many people nearing retirement are ill-prepared and have not saved enough. Almost 30% have no savings at all. According to Fidelity, America’s largest retirement plan provider, the average 401(k) for ages 60-69 was $192,800 in 2018. This is not nearly enough for a comfortable retirement. Therefore, although the high costs involved in the reverse mortgage can be a deterrent, it can be a useful tool to ease the retirement burden.