What's the right situation for taking out a reverse mortgage?
As is the case with any financial decision, a borrower has
to decide whether a reverse mortgage is right for their particular needs. In order to even consider a reverse mortgage,
you must be at least 62 years old and be in a strong position on your home,
either owning it free and clear, or having a low remaining mortgage balance. With
that being said, there are a few notable situations when borrowers find reverse
mortgages particularly helpful
A Reverse Mortgage can be a Good Idea
You Need More Income
When you take out a reverse mortgage, you receive a monthly,
tax-free payment in exchange for agreeing to repay the loan plus interest
whenever you pass away, sell your home, or no longer use your home as your
primary residence. Most borrowers take
out a reverse mortgage because those tax-free payments can help their bottom
lines. For someone struggling to make
ends meet or for a homeowner who merely wants to improve their quality of life,
a reverse mortgage can offer you the money; though it will likely cost you your
home, since you’ll probably have to sell your home to repay your loan.
Used as an
Alternative to a HELOC
Many homeowners have also turned to reverse mortgage as an
alternative to Home Equity Lines of Credit (HELOCs). For a retiree in need of a large line of
credit to make home improvements or take care of living expenses, getting a
HELOC can be difficult, as they often have strict income and credit
requirements. On the other hand, reverse
mortgages have no income or credit requirement.
As long as you meet the age requirements and own most of your home, you
will not be refused. Many lenders even
offer a reverse mortgage as a line of credit, which can allow a homeowner to
borrow only as much as they need.
A more unconventional use of reverse mortgages in recent
times has been to protect retirement assets.
During tough economic times, many new retirees were reluctant to lock in
losses by selling their assets to pay for living expenses. A reverse mortgage can protect you in that
situation by providing a life raft until your portfolio recovers. It’s not an option that should be taken lightly
though, as your home will likely have to be sold to repay your reverse
Reverse Mortgages Might be a Poor
You Don’t Intend to
Stay In Your Home
Taking out a reverse mortgage is probably a bad idea if you
are not intending to remain in your home long term. A reverse mortgage must be repaid whenever
the last signer passes away, sells the property, or moves from the home, even
if you require long-term hospitalization. As a result, if you are looking for a
short-term budget fix, there are better options than a reverse mortgage because
they often come with large upfront costs, expensive recurring fees, and high
interest rates. Usually a borrower does
not mind, since they will not be around to see the loan repaid, but if you do
leave your home for one of the above reasons, you will have to face the
accumulated balance on your reverse mortgage loan.
Have a Spouse Who Is
To sign a reverse mortgage loan, a borrower must be at least
62 years old. If you are eligible for a
reverse mortgage but your spouse is not because of age, a lender would not
allow your spouse to sign onto your loan.
If something were to happen to you, the loan would come due and your
lender would likely force your spouse to sell the home to repay your reverse
mortgage. Your spouse could attempt to
refinance a new reverse mortgage at that point, but they would be unlikely to
find a loan large enough to pay off the first lender. If you have a spouse that is ineligible to
join your reverse mortgage, it might be a better idea to try and wait until
they are eligible to join the loan with you or to try and find other options.
Even though reverse mortgage income is not taxed as ordinary
income, it could cause you to lose eligibility for government programs like
Medicaid or reduce your Social Security income.
After you look at reverse mortgage options, make sure to figure out how
it will affect your income as a whole. Taking
out a new loan only to lose out on other programs, could hurt your finances if
you are not careful.
If a Reverse Mortgage
Will Still Leave You in a Tough Financial Position
Many homeowners take out a reverse mortgage in a lump sum to
pay off their original, conventional mortgage.
While this might save you your monthly mortgage payment, you should
ensure that you will be able to afford the taxes and insurance on your home
after your mortgage is paid off. If you
will still be in a precarious financial position after taking out a reverse
mortgage, you should ask yourself if a new loan will really help you, since a
reverse mortgage is often expensive and could end up costing your home just
like any other type of mortgage.
It depends on why you want to do a reverse mortgage. Â Do you want to have a stream of additional income, are you paying off a mortgage to free up some extra cash, or do you want some financial flexibility in your retirement?