A Reverse Mortgage can be a viable way to raise money for those who are at least 62 years old, by tapping into the equity in their home. But it’s not necessarily a good idea for everyone who might be eligible. With something so significant, it’s extremely important to be aware of the downsides as well as the upsides of such a financial product. We will discuss some of the pros and cons here.
What is a Reverse Mortgage?
Simply put, a Reverse Mortgage is a loan or line of credit that a homeowner who is at least 62 years old can get as long as they have enough equity in their home. The Reverse Mortgage is only paid back when the homeowner dies or moves to a new primary residence. This makes it well worth consideration when one member of a senior couple needs money to move into an Assisted Living Community while the other will remain living at home.
You can choose to receive the income in one lump sum or as a stream of monthly payments, or even a combination of the two. The older a homeowner is when they get a Reverse Mortgage, the higher the monthly payments available to them can be. One of the nicer aspects to these loans is that no credit check is required and the process is uncomplicated since it is based solely on the amount of equity in your home.
When is a Reverse Mortgage a bad idea?
A Reverse Mortgage is basically a loan, that typically comes with a relatively high interest rate compared to other loan products and closing fees are normally assessed as well. For these reasons, a Reverse Mortgage may not be the best choice in many cases. It’s somewhat like getting a cash advance from a credit card. It might be a good option if you have to pay rent, but not a good option to use for non-essential reasons.
To use for frivolous expenses
For those who are looking for a way to raise money for travel or a new car, a Reverse Mortgage is not a good idea. Remember the administrative costs and interest rates are high, and it is hard for a senior to justify accessing the equity in ones home to use for something that is non-essential.
If you don’t have enough equity in your home
A Reverse Mortgage is based on how much equity (the amount the home is worth minus what is owed on it) the borrower has in the home if a home is worth $500,000 and it’s totally paid off, then the equity is $500,000 and through a Reverse Mortgage the owner could access a large portion of that. But if you owe $400,000 on a home valued at $500,000 then the equity is $100,000 and a Reverse Mortgage would only provide a portion of that. In the latter case, the fees involved may be too high to make it worthwhile.
If you are only 62 years old or a bit older
A Reverse Mortgage is a tool to get you money that you will use through the rest of your life. If you still have decades left, then a Reverse Mortgage will only provide a small lump sum and/or monthly payments. They are most popular and effective for homeowners in their 70s or even their 80s.
When is a Reverse Mortgage a good idea?
As we’ve discussed, a Reverse Mortgage is a very welcome tool for many senior citizens who have essential expenses but also equity in their home.
A way to pay for Assisted Living for one member of a couple
It can be very stressful when one member of a senior couple needs more care than they can efficiently get at home, and a big part of that stress is often financial. The reality of financially maintaining a home in addition to making monthly payments to a senior living community can be difficult. In a situation such as this, a Reverse Mortgage could be an ideal solution as it can pay for all the expenses for both members of the couple, while still allowing one partner to live at home.
If most of your wealth is tied up in your home
Financial advisers typically tell us to diversify our investments and take on less risk as we get older. But still, for a great number of people, the major portion of their total wealth is in the value of their home. If for example you own a $500,000 home, free and clear, and you don’t have much cash or other liquid assets, taking out a Reverse Mortgage might make sense, to allow you a better quality of life based on your real net worth
If your standard of living would suffer without it
Again, for many people a Reverse Mortgage should not necessarily be the first choice to raise money. But, in some cases, it could be the only choice. In spite of the relatively high costs associated with taking out a Reverse Mortgage, if without it, your quality of living would suffer and put a strain on your family members, then it’s still something to think seriously about.
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