You’ve seen the commercials on television. There are even well known celebrities touting them, but is a reverse mortgage really good for your retirement? Most would argue it is; some would argue it isn’t. It boils down to your current financial situation and whether the reverse loan would benefit your retirement finances and savings. The best way to determine if this option is right for you is to evaluate its pros and cons. Here are some of them for your review.
Most consider the number one pro of a reverse mortgage to be no more house payments. In a reverse mortgage, a company, such as American Advisors Group, basically purchases your home from you but still allows you to live in it. You retain official ownership – your name stays on the deed – but when you die, the home transfers ownership to the reverse mortgage lender. This being said, no house payments help you live more comfortably in your retirement, which is a nice perk.
With an AAG Reverse or other lender’s mortgage, you can take the monies in one lump sum, in monthly advances for a designated duration, or as a line of credit you can tap into when needed. Some lenders will also allow you to combine these options, such as taking a small lump sum so you and your spouse can travel around the world and put the remainder in a line of credit. It’s important to note there are fixed or adjustable interest rates attached to these monies.
You can finance your traditional closing costs in the reverse mortgage, which means little money comes out of your pocket once the reverse mortgage is approved. Most reverse mortgages are also exempt from income taxes, although it’s always wise to confirm this with the lender and your CPA. In most cases, the reverse mortgage will not affect your Medicare and Social Security, and you nor your heirs are liable for any increase in your home’s value once the reverse mortgage is collected.
Nothing is too good to be true, and reverse mortgages do come with some cons. Because you still live in your home and retain its title, you remain responsible for home insurance and maintenance costs, homeowners association fees (if applicable), and your property taxes. You also remain responsible for loan interest and fees as they accumulate over time. If you financed your closing costs, you’re liable for those, too, if they aren’t covered in the loan collection, i.e. your home’s sale.
If you plan to leave your home to your children, they won’t get it with a reverse mortgage unless they buy it outright. Once you pass on, your home’s title is transferred to the lender, as mentioned above, and if there isn’t any equity leftover in your home, your kids won’t receive anything from its value. Another thing to watch out for is the mortgage fees. In some cases, they are higher than traditional mortgage fees, so keep an eye on them.
Check with your Medicaid and Supplemental Security Income benefits consultants, too, if you receive either of these federal aids. A reverse mortgage can affect your eligibility and/or benefits amounts, so don’t go into the loan blindly. Understand that if you are ill and must vacate your property for longer than 12 months due to hospitalization, the lender has the right to sell the home and force the repayment of your mortgage. You cannot vacate your home for more than 6 months when healthy.
Is a reverse mortgage right for you? Only you can tell, but now that you know the pros and cons, you’re better suited to make a decision. Talk with experts in reverse mortgage lending and your CPA and benefits consultants. Make sure you have the answers to all your questions.