Reverse Mortgage 101: Is It Right for Your Golden Years?
Many senior citizens are bombarded by advertisements promoting new reverse mortgage offerings, which can offer extra income during retirement. A reverse mortgage essentially entails selling your home in pieces for monthly payments. It does provide an excellent source of much needed income for many seniors, but it can also prove to be a costly way of raising funds.
Is a Reverse Mortgage Right for Me?
It depends. Life expectancy and how much you need to retire are two critical elements. If you’re in a position to work and only need an extra hundred to two hundred dollars per month to make ends meet, you’re far better off with a part-time job. However, if you’re not in this situation, and Social Security isn’t quite footing the bill as you would like, the reverse mortgage may be perfect for you.
Several Different Facilities
There are several different options for cashing in the equity in your own home. There are lines of credit which provide the most freedom, allowing you to take the line of credit as you need it. Then there are the lump sum, tenure plan, and a combination of the two.
The lump sum is exactly as it sounds; the full balance of your home’s appraised equity is paid to you in cash. The tenure plan pays out a monthly sum, and the combination plan allows for a tenure or lump sum to be mixed with the line of credit.
You Can’t Move
The inability to move is what holds many people away from reverse mortgages and financially ruins many others. Reverse mortgages last for as long as you own the home, meaning if you move and sell the home, all of the balance is due immediately. And because many plans price in an estimated appreciation value for your home, you could end up paying far more than you ever expected.
Be Ready for High Fees
Most reverse mortgages are loaded with fees to account for a brokerage commission. Expect fees as high as 10% of the equity of your home as stated by the lender. This fee is generally taken out of the loan when it is given to you; instead of receiving a check for $100,000, only $90,000 may make it into your bank account.
Payouts Based on Age
The older you are, the better payout you will get against the equity in your home. This is because lenders view you to be a limited risk, as the chance you’ll burn through all of your equity cash payment is almost zero. Lenders hope to recoup some of the lent money and cover the remainder through the sale of your home, and subsequently, it is obvious they’d rather lend to older retirees.
Talk to a CFP First
There are literally hundreds of reverse mortgage variants. It’s always best to evaluate your special circumstances with someone who truly understands your situation and can help you decide which route to take. The reverse mortgage business is very profitable for lenders, and it can be a great opportunity for borrowers should the need be there. However, if you don’t have that much of a need for cash, you’re better off skipping a reverse mortgage.