If you are planning your retirement and considering a reverse mortgage to supplement your monthly income, this article is for you. Your home is an important asset that you have invested in, cared for, and raised your family in. Not only is it a place for you to live, but it holds significant value, value that you may want to start receiving back when you retire. This is where a reverse mortgage seems to be a viable solution, but is it really?
What is a Reverse Mortgage?
A reverse mortgage is a loan based on the equity in your home. It does not initially seem like a loan because there are no monthly payments for you to make; in fact, this type of loan pays you a monthly payment. But at what cost to you? The following points must be considered very carefully if you are considering a reverse mortgage after you have reached the age of 62:
- Origination fees are extremely high. A reverse mortgage is basically a home equity loan. However, the risks to the bank are higher because it is designed as a retirement product. It is not based on your monthly income or your credit score so the risks are inherently higher for the loan. Not only will the loan principal be based on a highly discounted appraisal of your property, but the fees and closing costs are significantly higher. This reduces the amount of money you receive every month.
- High interest rates. Again, the bank slides the risk/reward scale to their side by charging higher interest rates for the reverse mortgage loan. This effectively eats up your equity at a higher rate and if you combine this with the high origination fees, you might be surprised at how little you are being paid for your equity. The bank is getting a major share and doling out a much smaller portion of your equity to you.
- Your heirs cannot keep the house unless they pay off the reverse mortgage. And because the bank has secured such a large portion of the value in the house, this will take a considerable amount of your estate and/or your heir’s own funds.
- The reverse mortgage requires you to live in the house. Many people who retire will eventually downsize their house from the size previously required to raise a family. Upkeep of a large home becomes tedious and expensive. Also, retirement is the time to spend traveling, sometimes for extended periods. The bank may call the loan due in full if you are not in the house for a year so and renting your house is not possible within the rules of a reverse mortgage. If you must move to a long-term care facility, the burden of paying off the reverse mortgage could be coming at a bad time.
- You must continue to maintain the house according to contractual requirements of the loan. You also must keep all the taxes and HOA fees paid. Any breaches of this could result in the bank calling your loan due.
Once you carefully review all the aspects of a reverse mortgage, you may find several that just do not make it worth the trouble, especially since there are great alternatives that will provide a better income with fewer restrictions. Here at D&G Smith Homes, we are experts in purchasing and reselling houses and we encounter so many retired people who are under a reverse mortgage. Many of these have had their situations change and are encountering hardship due to the restrictions of a reverse mortgage.