There are many circumstances in which a person discovers that their retirement income is not quite enough to cover all of their costs. Whether more money is needed for healthcare, to replace a spouse's income, or to meet rising costs of living, many seniors are looking for ways to meet their financial needs.
A reverse mortgage is one option available to seniors who have paid off, or nearly paid off, the mortgage on their home. Reverse mortgages are available to individuals over age 62, and they work differently than almost any other type of loan. With a reverse mortgage, the borrower receives payments rather than making them. The loan gets paid back when the homeowner sells the house, so the owner is not adding to their financial burden the same way as they would with a traditional loan. Because reverse mortgages work differently, it is important to learn more about them and make sure it's the best choice before committing.
As with all financial matters, there is a lot of bad advice - or worse - surrounding reverse mortgages. Always beware of any sales presentations that make a reverse mortgage sound too good to be true. Sometimes these are scams, and other times they are high fee or high interest loan products that commissioned salespeople talk homeowners into before they can do their homework.
As with any major financial decision, it is vital to speak with trusted advisors who put their clients' best interests first. People who can offer advice on reverse mortgages, and possibly offer one with a fair rate, include:
Not only will these individuals offer advice or help clarify the decision making process from their own area of expertise, but they will also help homeowners avoid scams and predatory loans. Individuals should also consider speaking with their family members who would need to know about the loan in case of a major life change.
Though a reverse mortgage can be a great way to leverage home equity for additional retirement income, it is not always the best route. Seniors who need more income should review multiple options before making a final decision. In talking to the professionals previously mentioned, individuals may be presented with alternatives that make more sense.
What is often most appealing about a reverse mortgage is that it generates a significant amount of capital that the borrower can use however they wish. Homeowners must be diligent about budget planning to make sure the funds will last long-term and consider something else if not. Also, a reverse mortgage will have a significant impact on legacy planning. Once the home is sold, a large part of the proceeds will be used to pay off the loan. If a senior is hoping to pass on family wealth in the form of their real estate, a reverse mortgage would greatly reduce this inheritance.
In some cases, the homeowner must determine if selling the house, rather than borrowing on its equity, is the better financial plan. If the house is not well-suited for aging in place, then downsizing may be a way to both reduce needed income and put money in the bank for ongoing expenses. For the senior who is still thinking about legacy planning, it may be better to keep the house, but move out and generate rental income with it.
Reverse mortgages are not the only way for seniors to leverage home equity for supplemental income, but they are a very useful and beneficial option. It is important for seniors to go about the process carefully so that they make the most prudent financial decision for long-term security. If a reverse mortgage is the best choice for ongoing retirement income, be sure to communicate the information about the loan to anyone who may be responsible for handling it in the future.