Is a Reverse Mortgage a Good Idea?

As you eye your expected retirement date, you might still be investigating different ways to generate retirement income. You might have heard of reverse mortgages, and you’re wondering whether this could be a good option for you. The answer is, it depends upon your unique circumstances.

First, what is a reverse mortgage? It’s an arrangement between you and a lender, which essentially allows you to tap in the equity you hold in your home. If you own a home outright, or you’ve paid down the balance on your mortgage significantly, you can receive payments or a loan from the bank. You continue to live in the home throughout retirement, and you don’t have to repay the bank until you die or move out of the home. At that point, the house can be sold to pay the debt.

As you can imagine, a reverse mortgage is not a great idea for everyone. But due to the pros and cons of these situations, it might work for you. Here’s what you need to know.

Pros of reverse mortgages:

• All money received from a reverse mortgage is tax free
• You can eliminate your monthly mortgage payment, if you have one
• You won’t owe anything to the lender as long as you continue to live in the home
• Payments are flexible; you can choose a monthly payment, a one-time loan, or a credit line
• Loan balances can’t exceed property values, so you don’t have to worry about owing more than you can repay later

Cons of reverse mortgages:

• You have to be 62 years old to qualify
• You must hold significant equity in the property in order to qualify
• You will pay fees and closing charges
• You won’t be able to pass the home to your heirs, unless they pay back the loan
• If you need to move out of the home, the entire loan balance will become due
• Defaulting on the loan terms can mean foreclosure
• The income from a reverse mortgage might render you ineligible for government benefits like Medicaid or Supplemental Security Income

As you can imagine, unpredictable life events could turn a good deal into a bad one. So you want to investigate the terms of a reverse mortgage carefully before making a commitment. Let’s discuss this issue at our next meeting, along with other potential streams of income for your retirement years, so that you can make the choice that works best for you.