Is a Reverse Mortgage the Right Move for Retirement?

Just last month, one of the Finance Opinion team writers packed up their desk and said their goodbyes – they were finally off to enjoy their hard-earned retirement. And while retirement may feel like an aspirational, yet unrealistic, goal for most, there are some savvy ways to achieve it – especially if you’re a homeowner.

Leveraging your home’s equity to fund large expenses isn’t a new concept. From Cash Out Refinances to Home Equity Loans, homeowners have the opportunity to tap into the equity available in their homes to pay for pretty much anything.

But does tapping into your home’s equity make sense as a retirement strategy? If you’re getting ready for retirement but wondering how you’ll fund it, there are some pros and cons to consider to see if leveraging a reverse mortgage is the right fit for you. Read on as the Finance Opinion Team breaks it all down for you. 

What is a Reverse Mortgage?

In short, a reverse mortgage is a type of loan available to homeowners ages 62 and older who have equity available to borrow against the value of their home. Instead of making monthly payments to the bank (like you would with a mortgage or other bank loan), you’d  receive monthly installments from your mortgage lender. However, unlike a typical loan, a reverse mortgage doesn’t require you to make any loan payments, making it an appealing option if you’re looking to fund large expenses like retirement.

So how does the loan get paid back? It may sound a bit morbid, but the entire loan balance is due when you, the borrower, dies (or permanently moves away or sells the home). This means the loan balance typically falls to your heirs, so it’s important to keep them involved in the decision making process when considering a reverse mortgage.

The Pros 

No Monthly Payments

Reverse mortgages work in the reverse way of a loan, meaning instead of making monthly payments, you receive monthly payments to stay in your home — with no payments due until the end of the term.

Easier Access to Retirement Funds

For families with little to no retirement savings, a reverse mortgage can be the difference between retiring or staying another ten years in the workforce. By leveraging the equity tied up in your home, a reverse mortgage can help mitigate cash flow issues that arise once you’ve stopped working.

The Cons

They’re Expensive

Reverse mortgage proceeds may not be enough to cover property taxes, homeowner insurance premiums, and home maintenance costs – let alone living comfortably in retirement. 

Additionally, reverse mortgages, like most loans, come along with origination fees, which compensate the lender for processing the loan. According to Lending Tree, these fees are typically equal to either $2,500 or 2% of the first $200,000 of your home’s appraised value — whichever is greater — plus 1% of your home’s value above $200,000.

You Can’t Move

If a move may be in your future, a reverse mortgage could end up costing you more than its worth in the short-term. On top of the up-front fees we just mentioned, reverse mortgage borrowers who move, sell, or permanently vacate the property have an average of six months to repay the loan. So while funds from selling your home may help with this, you’ll lose thousands of dollars in reverse mortgage costs already paid out. 

Your Heirs Can Lose Your Home

One of the biggest drawbacks of a reverse mortgage is that your heirs can lose your home to the bank if they don’t have the funds to pay your loan back, so if you value keeping your home in the family, a reverse mortgage may not be the best fit for you.

According to federal regulations, heirs are required to repay the full loan balance – or 95 percent of the appraised value of the home – whichever is less. Lenders will usually give your heirs options for repayments, which includes selling the home or refinancing the mortgage. But, if your heirs don’t meet the repayment requirements, the lender can choose to foreclose on the home and sell it. 

Retirement is a big goal, but entering into a reverse mortgage to fund that goal can be a big decision. If you’re considering a reverse mortgage to fund your retirement, the lump sum or monthly payments can certainly be appealing to homeowners looking to live comfortably off the hard-earned equity built up in their home. 

However, reverse mortgages do come with drawbacks that you should consider. Before signing on the dotted line, be sure to conduct thorough research and properly educate yourself on all of your available options.

However, reverse mortgages do come with drawbacks that homeowners should consider. Before signing on the dotted line, be sure to conduct thorough research and properly educate yourself on all of your available options. 

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, we advise you to consult with a licensed advisor.