What is a reverse mortgage and is it a good idea?
If you are a homeowner who is 62 years or older (and your home was built after June 1976), you are eligible to apply for a reverse mortgage. Essentially, a reverse mortgage is a loan payment you can borrow against the value of your home. You are not required to make any payments on the loans you receive. Instead, the loan balance is payable when you pass away or sell your home.
Federal law prevents reverse mortgage loans from exceeding the value of your home, and if the loan balance does become larger than the home’s value, you or your trustees will not be responsible for the differential balance. An example of a situation where this might happen would be if the housing market value drops and you have already received a lump sum payment in your reverse mortgage.
Should I get a reverse mortgage on my home?
There is no cookie cutter answer for whether or not someone should get a reverse mortgage on their home. You may hear a lot of people say it is a great option for retirees who want to supplement their incomes, but you need to understand what all it entails if you go through with it.
If you accept a reverse mortgage loan, you are putting up your home as collateral for your loan payments. If you are planning on leaving your home to a trustee, then you should avoid a reverse mortgage.
Additionally, a reverse mortgage reduces the value of your estate. There are “hidden” costs that add up in your reverse mortgage loan, including insurance premiums, third-party charges, origination fees, service fees and interest. You can cover these costs upfront, but if you choose not to and finance them through your loan instead, this lowers your home equity over time.
That could be a problem if you choose to receive reverse mortgage payments as a line of credit instead of a lump sum or annuity. Your home could lose value and you do not get the full payment you desired.
If you need a loan and do not mind making monthly payments to eliminate your debt, a home equity loan may be a better idea.
Is a reverse mortgage ever a good idea?
Before we make it all seem doom and gloom, there are advantages to using a reverse mortgage that may be right for some. For starters, if you are not planning to leave your home to any trustees, a reverse mortgage could help you generate some supplemental income with loan payments that are not counted as taxable income. Additionally, you will not need to qualify for credit or make monthly payments because your home itself is the collateral for your debt.
A reverse mortgage can be a great way to stay in your home during retirement and generate supplemental income, but you need to think about what you want out of your home and whether a reverse mortgage is the best decision.
Talk to a ProVise CFP® professional about planning for your retirement
Making the most out of your retirement requires a lot of careful planning. Hard work may be the last thing you want to do when you are retired or approaching retirement. However, helping you navigate the financial challenges of retirement is exactly what we can help you with at ProVise Management Group.
Our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a financial plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about planning for your retirement? Contact ProVise today to schedule a complimentary consultation.